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Do ETFs Suggest that the China Panic is Over?

To start the fourth quarter, many investors were in a nearly in a state of panic over the economic health of China. Growth levels hit a multi-year low of 7.4% in Q3 while worries over protests, labor competitiveness, and a leadership transition also weighed on investor perception of the massive economy.

Thanks to this negative tone, many investors had shunned China ETFs and stocks to start the period, forgoing exposure to the country for nations that are perceived as much higher quality in this uncertain time.

However, despite this uncertainty hanging over China, some are starting to grow optimistic that the country has bottomed out and has successfully avoided a dreaded ‘hard landing’ in the near term (see The Guide to China Bond ETFs).

"7.4 percent GDP growth in Q3 could mark the trough” for China said analysts at Bank of America Merrill Lynch. “Now we are seeing an increasing amount of evidence for green shoots. This evidence comes from a wide range of sectors including transportation, commodity, exports, property market, credit and money data, tourism during Golden Week and restocking by manufacturing companies."

Due to these hopes of a China bottom and the anticipation of mild government stimulus when the leadership transition takes place, many are growing more optimistic over China in the near term. In fact, CNBC recently ran a headline of “Suddenly, Everyone’s Turning Bullish on China”, further underscoring the shifting sentiment of the investment community on the major emerging market (read China ETF Investing 101).

This lightning-quick move in the outlook on China has also been reflected in the ETF performance of funds tracking the important emerging market. In fact, according to data from XTF.com, over the past month, of their look at country specific funds, seven of the top ten performers are targeting the Chinese market (as of October 23rd).

This is pretty astounding considering how negative most investors were regarding Chinese stocks to close out Q3, as it signifies a huge reversal in an extremely short time period. Furthermore, the strength hasn’t been limited to any one segment of the overall Chinese economy, as represented by the broad strength that ETF investors have seen in a number of targeted China funds over the past month.

For example, while FXI has added about 8.4% (at time of writing) over the past month, the Chinese small cap focused ETF HAO, and the All-Cap Fund YAO have also seen gains exceeding 7.4% as well. Meanwhile, investors also saw the more locally focused PEK edge out the large cap centric FXI too, suggesting that companies closer to the ground have also participated in the rally to a great degree.

Beyond this, a trio of specialized China ETFs, two funds from Global X—the China Financials ETF (CHIX) and the China Industrials ETF (CHII)—along with EGShares’ China Infrastructure Index Fund (CHXX) led the way for China ETF gains over the past month. Furthermore, these three were among the best performing country-specific ETFs in the time period in question, only trailing the rebounding Greek ETF (GREK) which ran away with the monthly performance title (also read Three China ETFs Still Going Strong).

Clearly from an ETF look, the China panic is over, at least for now. However, even with these strong gains, investors should realize that most Chinese investments are still down considerably when looking at longer time periods, suggesting that the nation may not be out of the woods yet.

This could be especially true given the ongoing weakness in Europe, and a host of earnings misses back in the American market, meaning that two of China’s most important trading partners could still be in the doldrums (also see If China Slumps, Avoid These Three Country ETFs).

Due to this, we maintain our Zacks ETF Rank of 4 or 'Sell' on the majority of the Chinese ETFs currently on the market, forgoing an upgrade until more concrete and longer-lasting evidence over China’s economic health—and the broader global economy—appears.

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