Big news from China offers investors opportunity as the country reaches a turning point
China made the news last week as its first quarter growth slowed to 8.1%, missing analyst estimates and logging the slowest growth in three years. While most analysts expect a soft landing, the figures indicate the ongoing possibility of a hard landing, and U.S. stock prices responded to the news with a sharp downturn late in the week to end the worst week of 2012.
Then over the weekend, China announced that it is expanding the band in which the yuan can trade against the US dollar from 0.5% to 1% in an attempt to battle the slowdown and perhaps make China’s exports more competitive on global markets by making them relatively cheaper than the country’s competitors.
The GDP growth number was significantly lower than 4th Quarter 8.9% expansion, and overall fixed investments were up 19% compared to 24% the year earlier.
Exports also slowed to approximately 7% compared to the usual double digit growth as Europe and the United States saw their economies slow and imports from China decline.
Finally, the China real estate market continues to cool and many suspect that a bubble in that asset class is slowly deflating as sales declined about 15% year over year.
The news has not been lost on the Shanghai Composite Index which is down some 20% since last spring.
In the chart above we can see how the index has been in steady decline for nearly a year, bottomed at the beginning of 2012, and now is trying to make a comeback; however, Shanghai still faces significant resistance ahead as it tries to reclaim its 200 day moving average.
iShares China 25 Index Fund (NYSEARCA:FXI) is a widely traded China ETF and its chart shows a similar picture, with the index trying to reclaim the 200 day moving average but well below the widely watched 50 day moving average.
So China appears to be at a significant turning point. If its economy continues to cool towards a hard landing scenario, there will be opportunities to short China using both ETFs and put options.
In this instance, one strategy would be to buy put options on iShares FTSE China 25 Index and another would be to buy the inverse China ETF, ProShares Ultra Short China 25 Index (FXP)
As you can see in its chart, it has recently formed a bottom and started to climb above its 50 day moving average.
Long China positions would obviously be available in (FXI) and another way to get exposure to China is through one of the BRIC or emerging market ETFs that include China in their holdings.
Major China ETFs include iSharesMSCI Hong Kong INdex (NYSEARCA:EWH) and iShares MSCI Emerging Markets ETF (NYSEARCA:EEM) which also has significant China exposure.
Another look at the Shanghai Composite shows the 50 day moving average (blue line) still below the 200 day moving average (red line) which is the widely watched death cross, indicating bear market and a sell signal among technicians. The 50 day is trying to turn up and should it cross the 200, long positions would be likely in order, while failure here, would suggest the potential for further declines ahead.
Bottom line: China is at a significant turning point, and while many analysts suggest that the worst is over, I would suspect that there could be rockier patches ahead as Europe slows and the United States continues to be on weak footing. China is extremely dependent upon its export activity and a slowing developed world can only be bad news for the dragon. As always the chart will tell the story, and investors can use the broad moving averages as a guide to position themselves on the right side of this important global market.