Getting Choosy With China ETFs

Investors finally appear to be responding the long-cited battle cry of China bulls. That being that stocks in the world’s second-largest economy are cheap.

While other emerging markets ETFs, including those tracking Brazil and South Korea, were saddled with outflows last month, $1.2 billion poured into China ETFs, according to BlackRock. Investors were rewarded for making the move into China ETFs because some, including the iShares China Large-Cap ETF (NYSEArca: FXI), posted strong November gains. [November Reign for China ETFs]

But with the recent run-up in Chinese stocks, investors now need to be more selective with this market. “China is no longer a beta market. In the past, people would think about China as an emerging market. They would just close their eyes and buy China,” said Michael Chiu, Asia Pacific equities investment director at HSBC, in an interview with CNBC’s Leslie Shaffer.

That strategy may be running on fumes, particularly when it comes to the oft-discussed Chinese consumer sector. HSBC noted “that while three of the top five MSCI China index performers are consumer plays, so are the index’s three worst performers,” CNBC reported.

The Global X China Consumer ETF (NYSEArca: CHIQ) is up 4.2% since Nov. 10 and turnover was brisk in the ETF on Thursday when more than seven times the average amount of shares changed hands. While it is expected that if the emerging markets consumer story rebounds in earnest that the rebound will be led by Chinese consumers, playing that theme with CHIQ will not be cheap. The ETF’s P/E ratio of almost 19.2 is pricey compared to the Chinese market in general. [Still a Case for the Emerging Markets Consumer]

Still, Chinese stocks are inexpensive, particularly those in the A-shares markets of Shanghai and Shenzhen. Stocks in Shanghai and Shenzhen are nowhere close to the all-time highs set in 2007 and 2008, according to CNBC.