DB Lowers Outlook on China; ETFs Could be Pinched

ETF Trends

China’s economic reforms have been lauded as catalysts for further growth, but some analysts caution against over exuberance, with China’s stocks and related exchange traded funds potentially running into trouble next year.

“There is potential for a debt trap in industrial companies which can trigger an economy-wide financial crisis as early as next year,” Deutsche Bank AG equity strategist John-Paul Smith  said in a Bloomberg article. “If I am wrong on China, I am wrong on everything.”

Smith predicts that the slowdown in China could drag down the emerging markets by 10% in 2014. [China ETFs Could Get Even Cheaper]

China stocks have declined for the year, but the sell-off eased after the government pledged to expand economic freedoms for the first time in at least two decades. Policy makers is encouraging private investment in state-controlled industries, raising convertibility of the currency and liberalizing interest rates.

Morgan Stanley and Goldman Sachs have upgraded their outlook on China after the free-market reforms. [China Stocks, Hong Kong ETFs Could Surge in 2014]

Smith, though, argues that China’s economy is at risk of expanding less than 5% annually over the next couple years.

“The proof will be in the implementation,” Smith said. “It will be very interesting to see if they really intend to go down the same ‘hard state liberal economic’ path that Russia did from 1999 to the autumn of 2003. So far, there is no indication they are prepared” for that.

The iShares China Large-Cap ETF (FXI) , the largest China-related ETF, is down 4.9% year-to-date. FXI tracks a group of large-cap Chinese companies, which are listed on Hong Kong and have significant exposure to state-owned companies.

The  SPDR S&P China ETF (GXC) provides broader exposure to Chinese equities, with 251 holdings, compared to FXI’s 26. GXC is up 4.9% year-to-date.

Additionally, investors can consider  a small-cap position, with the Guggenheim China Small Cap ETF (HAO) . HAO is up 8.8% year-to-date.

iShares China Large-Cap ETF

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For more information on China, visit our China category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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