ETFs tracking China’s stock market are on a roll in the fourth quarter amid better economic data and a leadership transition after badly lagging the S&P 500 for most of the year.

For example, iShares FTSE China 25 Index Fund (NYSEArca: FXI) is up 16.2% the past three months while SPDR S&P 500 (NYSEArca: SPY) is about flat with a 0.2% gain, according to Morningstar.

The Shanghai Composite Index has been caught in a downtrend since the beginning of 2011 but the recent really has carried the benchmark back up to a key resistance line and the market is threatening to break out, according to

The Chinese stock market went parabolic from mid-2005 until late 2007. “China’s boom was immediately followed by a financial crisis induced bust with the Shanghai Composite Index plunging 72% in a little more than one year,” it notes. “Over the past week, the Shanghai Composite has worked its way higher as Chinese stock market investors anticipate the introduction/extension of stimulative government policies after this week’s Central Economic Work Conference.” [The Case for China ETFs]

China ETFs were punished in the first three quarters of 2012 on worries the developing market was facing a “hard landing.” However, the funds have recovered on signs the economy is picking up steam again.

The new Chinese leader, Xi Jinping, is trying to instill confidence in the world’s second-largest economy. Investors speculating on additional economic stimulus have also provided a boost to Chinese ETFs. [ETFs to Access China’s New Growth Phase]

“Even though the [U.S.] fiscal cliff may be of concern, couldn’t the China ETF moving higher be sending a positive message about China’s economy and maybe global growth prospects?” says Chris Kimble at Kimble Charting Solutions. From a technical standpoint, he says FXI, the China ETF, is breaking above the top of a so-called flag pattern, a bullish sign. FXI entered Wednesday’s trading on a six-day winning streak.

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