China’s Economy Is Melting
By Simon Maierhofer, Co-Founder
September 18,2008

SAN DIEGO - (ETFguide.com) - Talk about a jackpot for investors; insatiable demand, explosive growth and a government eager to buoy economic expansion. China had it all!

The Shanghai Stock Exchange soared from 1,000 in 2005 to over 6,000 in October, 2007. The Hang Seng Index, composed of the 40 largest stocks traded on the Hong Kong Stock Exchange, went from 13,300 in 2005 to almost 32,000 in October, 2007.

The iShares FTSE/Xinhua China 25 ETF (NYSEarca: FXI) ascended from $17 in 2005 to $79 (split-adjusted) in October, 2007. As it turns out though, prices have never revisited the lofty October levels. In fact, Chinese equity markets peaked about nine month before the Olympic opening ceremony. Inhospitably, the Hang Seng Index greeted the Olympics with a 40% decline.

ETFguide's Ready-To-Go Portfolio subscribers received a sell signal on FXI at its all time peak of $219 (before the split) on October 17.

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You might find it humorous (at least if you didn’t own FXI), that FXI was crowned with Mornigstar’s coveted five-star rating just before the bleeding started (should Morningstar’s ratings be used as contrarian indicator?). At the same time, Morningstar dubbed the SPDRs S&P China ETF (AMEX: GXC) one of the worst new ETFs of 2007. Even though Morningstar’s logic on this diverse  treatment is less than transparent, they were right, at least on GXC.

The expected pre-Olympic rally was as absent as profits from GMs balance sheet. Just in time for further losses, iShares launched another new China ETF, the iShares FTSE China (HK Listed) ETF (Nasdaq: FCHI). While FCHIs nearly 100 holdings grant more diversification than its narrow, 25 stock based cousin FXI, it too has not been able to buck the down trend in Chinese equities.

The Olympics, the capstone to an extraordinary run of achievements have passed. The focus is back on Economics 101. China, as many contries before, has hit a wall. Investors who hold any one of the over 20 ETFs with significant exposure to China, are itching to know whether China will be able to complement its rapid expansion with consistent growth.

Presently, it seems as if China’s strong suit has become its Achilles heel – Export. Those little, ever present, "Made In China" stickers have become the foundation of China’s explosive expansion. However, global demand for all kinds of gadgets is slowing at an alarming pace. This simply must be a tough pill to swallow for the Chinese manufacturing industry.

Looming homemade issues compound worldwide decay of growth:

1) Aging population: The long-delayed effect of the strict family planning policies (only one child per family) will kick in after 2010 when a decreasing number of workers will have to support an increasing number of elderly.

2) Resource restrictions: The explosive expansion has put a strain on global supplies of energy and raw materials, as well as its own resources of clean air, fertile land and drinkable water.

3) Social inequality: Rooted in socialism, China has turned into one of the world's most unequal societies. The gap between rich and poor is splitting like a pair of scissors. 

The Golden Dragon’s economic fate is as dependent on the global economy as a boat on the tide. It is low tide and investors are waiting for the next wave of opportunity, not only in China.

China-related ETFs: