Invest in China…..Or Just Its Government
- Posted by Greg Harmon
- on November 20th, 2012
This recommendation is popular recently. The change in leadership in China and what some see as the an attractive stock chart in the ETF $FXI, iShares FTSE China 25 Index (below) are some of the reasons for this view. And in fact the FXI is confirming a reversal higher with the Relative Strength Index (RSI) bullish and turning up and a Moving Average Convergence Divergence indicator (MACD) that is improving.
iShares FTSE China 25 Index, $FXI
But what does ‘Invest in China’ really mean? Buying the FXI is not really buying the Chinese market. The ETF actually has a 57% weighting to Financial Stocks and its Top 10 Holdings, accounting for 61% of its total assets, include 5 banks, 4 energy companies and China Mobile. Looked at another way, this ETF contains the top 25 companies in China. Buying the FXI is not investing in China, it is investing in large cap state controlled entities in China. If you look at the broader Shanghai Composite, $SSEC, containing every A and B share traded in China, it is quite a different story. The Composite has been in the most recent bear trend lower since May. At best you might be able to argue that it is consolidating sideways. Either way this is not a time to buy. Until it
Shanghai Composite, $SSEC
breaks back over 2150 there is nothing bright about its future, and the bearish and downward pointing RSI and negative MACD concur. This divergence has existed since that run lower in the broad market in May. The ratio chart below shows a clear rising channel favoring the FXI over the Composite. The large State run enterprises outperforming the smaller, more market driven companies. What does that tell you about the broad Chinese economy? You still want to ‘Invest in China’? Maybe instead the mantra should be invest in the Chinese Government.
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Gregory W. Harmon CMT, CFA, has traded in the Securities markets since 1986. He has held senior positions including Head of Global Trading, Head of Product Development, Head of Strategy and Director of Equity. (More)
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