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China Housing ETFs in Dicey Position

Don DionPortfolio Manager

NEW YORK (TheStreet) -- Earlier this year, things appeared to be looking up for Chinese real estate developers who have endured regulatory pressures in recent years from the bubble-fearing Beijing government.
At the start of February, the sector breathed a sigh of relief following reports that the nation's central bank had pledged its support for first time homebuyers looking to secure a loan. A number of municipalities, fearing that negative economic fallout would result from a steep housing downturn, have also stepped into the ring, hoping to convince the central government to back away from its restrictive stance.
Evidence of the improving mood surrounding China's housing market could be seen across real estate-heavy products like the iShares MSCI Hong Kong Index Fund and the Guggenheim China Real Estate ETF . The two funds witnessed steep run-ups during the opening months of the year, with the latter closing out February at its highest levels since early August.
The recent rally has been encouraging. However, this is not an investment opportunity I would encourage investors to take advantage of at this time. As we have learned more about the housing-related showdown taking place between the various layers of government in China, we are beginning to see signs that a potential policy reversal may just be a pipe dream at this time.
When the Chinese government took introductory steps to rein in the nation's housing market the effects were largely non-existent. However, in recent months, the impact of these restraints has begun to take effect.

In February, the Chinese Bureau of Statistics found that residential real estate prices declined not only from December to January, but also on a year-over-year basis. Lawmakers are ready to intervene in order to prevent a healthy downturn from transforming into an all-out crash. However, this has not stopped some from expressing their doubts that a prolonged, uncontrollable tumble could propel China into a concerning period of economic slowing.
At this time, however, Beijing is shown little willingness to budge from its tightening stance. At the start of the week, Xinhua reported that the government had reiterated its commitment to keeping housing prices low. Indeed one official warned that increasingly harsh regulations could be imposed on the local governments that are acting against the policies.
This news, combined with reports that China had pared back its 2012 growth forecast to 7.5% has created a great deal of turmoil for funds like TAO and EWH. In a matter of days, both funds have given back multiple weeks' worth of gains.
As we have seen in the opening months of the year, there is still a great deal of uncertainty surrounding China's real estate market. While single events may be able to drive funds like TAO to short-term bounces, the long-term picture is still too cloudy for my taste.

Rather than roll the dice with a single sector, investors looking for a safer bet on China's marketplace are still better off sticking to broad-based options like the iShares FTSE China 25 Index Fund . As usual, any exposure should be kept small. We have been reminded over the past few days of how volatile emerging markets can be.
Written by Don Dion in Williamstown, Mass.