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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