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.