How China’s ETFs May React To Changing Policies

The global economic game has shifted drastically and China will need to change its strategy if it wants to propel its economy and related exchange traded funds (ETFs) forward.

China has based its large growth on cheap exports and American consumers reciprocated with lots of cash, writes David Leonhardt for The New York Times. The Chinese government would then buy Treasury bonds, but China is now wary about funding U.S. government spending sprees that would cause inflation and eat away at Treasury returns.

Instead, China may buy up bonds from other countries. But this would only drop the value of Treasury bonds and the value of the hundreds of billions worth of bonds already held by China would plunge.

As China continues to export goods, the value of the country’s currency should rise, but China’s government has kept foreign exchange rates down so as to keep exports high. The government may go with a “beggar thy neighbor” policy where they put subsidies on exporters and limitations on imports to stimulate their own country at the expense of others.

Diminished worldwide demand has reduced 20 million jobs along the industrial southern coast of China. Coastal cities are experiencing mass unemployment. College graduates are unemployed across the country. The stock markets have fallen sharply.

Consumer spending only makes up 35% of China’s GDP. The culture of thrift in China has caused massive amounts of household savings. But tax cuts and the government’s focus on infrastructure projects aims to help households. There is also a health insurance plan that would be provided to hundreds of millions more people over the next couple of years.

• iShares FTSE/Xinhua China 25 Index (FXI): up 19.4% year-to-date

• SPDR S&P China (GXC): up 23.6% year-to-date

For full disclosure, some of Tom Lydon’s clients own shares of GXC.

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