Reform-Minded Beijing Lifts China ETFs

Some of the major  China exchange traded funds, namely the iShares China Large-Cap ETF (NYSEArca: FXI) have been struggling in recent session, but that trend reversed course Friday on news of surprise reforms courtesy of Chinese policymakers.

Shares of FXI, the largest and most heavily traded China ETF, are up 5.5 in midday trading on volume that is already 35% above the daily average. The SPDR S&P China ETF (NYSEArca: GXC), FXI’s less financial services heavy rival, is up 4.7%. News that communist party leaders have decided to relax China’s one-child policy and scrap re-education through labor camps ignited the rally in China ETFs.  [BlackRock: China as a Value Play]

Chinese policymakers also “said they will establish a system for insuring bank deposits and ease controls on prices for energy, water, telecom and other services,” reports Victor Reklaitis for MarketWatch.

The one-child policy will be relaxed for couples where one of the spouses is an only-child. Still, the news comes at a pivotal time for FXI, GXG and other China ETFs. Amid concerns of slowing, fears of non-performing loans and skepticism regarding the overall health of the country’s banking system, the largest China ETFs have slumped this year. Prior to Friday, FXI, which allocates 56.3% of its weight to bank stocks, was down 12% this year. [A Rough Road for China ETFs]

FXI was down 3.4% in the past month and was recently found struggling to hold its 200-day moving average.  Woes for FXI, GXC and related ETFs have stood in stark contrast to the impressive performances delivered by China Internet ETFs or those funds with heavy allocations to Chinese web names. For example, the Powershares Golden Dragon Halter USX China Portfolio (NYSEArca: PGJ) is up 19% in the past 90 days. PGJ is higher by 1.7% Friday. [A Good Year for Some China ETFs]

Morgan Stanley sounded a bullish tone on the world’s second –largest economy Thursday, predicting reforms would be positive for Chinese stocks.