3 Ways to Play Surging China Stock Market with ETFs – December 9 …

The stock markets across the globe are enjoying a boom this year, and China is no way behind. Chinese stocks have been on the tear over the past six months and the country’s Shanghai Composite Index hit the major threshold of 3,000 for the first time in three years on Monday trading session.

With this, the benchmark has surged nearly 20% over the past 10 days and an astounding 43% over the past six months. Also, China has overtaken Japan as the world’s second-largest stock market for the first time in three years with a total market cap of over $4.5 trillion.

Behind the Impressive Surge

The recent rally was sparked off by growing investor confidence in the prospects of a rebound in the Chinese economy, which is still struggling with falling property prices, weak domestic demand and lower factory output. Investors are betting that the loose monetary policy measures will revive the economy and pump billions of dollars into the country.

This is especially true as the People’s Bank of China (PBOC) last month surprisingly cut the interest rate for the first time in more than two years in an effort to boost the slumping economy and offered more flexibility to the Chinese bank in setting the interest rates on deposits (read: China ETFs in Focus on Surprise Rate Cut).

Many experts expect policy makers to expand stimulus to support the economy, which is heading for its worst growth since 1990. Chinese economic growth slowed to a more than five-year low of 7.3% in the third quarter, down from 7.5% in the second quarter and 7.4% in the first quarter. The country is expected to miss its annual growth target of 7.5% for this year. If this happens, it would be the first miss since 1998.

Additionally, exports grew 4.7% year over year in November, sharply down from the market expectation of 8% while imports fell 6.7% compared to the market expectation of 3.8%. All these raised speculations of further policy easing through reduction of a reserve requirement ratio, introduction of reverse repos and another rate cut in the first quarter. This has resulted in hot money flows into the heavyweight blue chips stocks.

Further, the trade surplus jumped 61.4% year over year to a record high of $54.47 billion in November, easily breaking the record of $49.87 billion seen in August. The trade surplus is expected to rise at least in the near term as sliding oil prices and other commodities continue to reduce the cost of imports and keep inflation low. Moreover, the real estate market is showing signs of stabilization as the government provided relaxation on the rules for the bank issuance of mortgages (read: Oil ETFs Crash As Crude Touches Multi-Year Low).

Apart from these, the launch of the Shanghai-Hong Kong Stock Connect program, which allows direct trading of Shanghai shares by investors outside mainland China for the first time, propelled the stocks higher, in particular the China-A shares.

The buying spree, resulting from opening of new accounts and risk appetite has pushed the Shanghai Composite Index higher by 24% over the past month, making it the best performing index among 93 global indices tracked by Bloomberg. Daily turnover on the bourses reached to above 1 trillion yuan ($163 billion) for the first time.

Potential Threats

Give the solid run-up in the Chinese share prices, China Securities Regulatory Commission (CSRC) warned of the risks of investing, as illegal trades and stock price manipulation flared up in recent weeks. In addition, the stock rally does not reflect the true picture of economic fundamentals.

Deng Ge, a representative for the CSRC stated that ““I hope investors, especially small and medium investors that are new to the market, invest rationally, respect the market, fear the market and bear in mind the risks present in the stock market.”

How to Play?

Despite the potential risk, most investors are bullish on the Chinese stock market buoyed by hopes for an economic rebound and seeking to ride out the current boom. For those investors, we have highlighted three ETFs that could make great choices in the current risk-ridden environment, provided they have the patience for extreme volatility.

PowerShares China A-Share Portfolio ((CHNA – ETF report))

Though each of the China-A Shares ETFs could be an excellent choice to play the booming stock market, CHNA has emerged as a strong performer over the past 10 days, returning close to 30%. It is an actively managed ETF providing exposure to the China A-Share market using Singapore exchange FTSE China A50 Index futures contracts.

The product is unpopular and illiquid with AUM of $3.2 million and average daily volume of less than 3,000 shares. It charges 51 bps in fees per year from investors (read: China A-Shares ETFs Soar on Cross-Border Trading Link).

Global X China Financials ETF ((CHIX – ETF report))

This ETF provides concentrated exposure to the financial segment of Chinese equity market by tracking the Solactive China Financials Index. In total, the fund holds 42 securities in its basket with the top three firms – Bank Of China, China Construction Bank, and Industrial & Commercial Bank of China – dominating the funds return at more than 9% share each. It is a large cap centric fund accounting for 84% of assets.

The fund has amassed $54.3 million in its asset base while trades in moderate volume of 45,000 shares per day on average. It charges 65 bps in annual fees and expenses. The ETF is up about 17% over the past 10 days and has a Zacks ETF Rank of 3 or ‘Hold’ rating with a Medium risk outlook.

db X-trackers Harvest MSCI All China Equity Fund ((CN – ETF report))

This fund provides exposure to all Chinese share classes – A-shares, B-shares, H-shares, Red chips, and P chips – along with China securities (including ADRs) in one ETF wrapper that are listed on NYSE Euronext (New York), NASDAQ, New York AMEX and the Singapore stock exchanges. This is easily done by tracking the MSCI All China Index (see: all the emerging Asia Pacific ETFs here).

The ETF attempts to gain exposure to the China A share components by investing in its own db X-trackers Harvest CSI 300 China A-Shares Fund (ASHR – ETF report). The ETF holds 153 securities in its basket with ASHR making up for nearly half of the portfolio. Other securities such as Tencent Holdings, China Mobile and Baidu hold less than 3.6% of total assets. Large cap takes a substantial portion at 87% while mid caps account for the rest with just 1% going to small caps.

From a sector look, the product is weighted heavily toward financials with 32% of total assets while information technology, industrials and consumer discretionary make up for double-digit exposure in the basket. The ETF has added more than 14% in the same time period.

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3 Ways to Play Surging China Stock Market with ETFs – December 9 …