China’s attempts to enhance its domestic economy at the same time that it tries to reduce its enormous trade surplus has affected the value of Chinese-based ETFs, ETNs and closed-end funds traded in the U.S.
There are at least two significant reasons for this. First, is the Chinese government’s “request” that banks stop lending to Chinese firms in an effort to cool investment in construction and real estate. Second, is China’s stubborn rejection of any move significantly to re-value its currency. Throw in strained trade relations with America over Google and a U.S.-arms sale to Taiwan, and you have even more reasons.
Here’s a look at some large and liquid Chinese-based funds that have seen substantial deterioration in share prices in the latest sell-off.
All-China Exchange-Traded Funds
iShares FTSE/Xinhua China 25 Index (FXI) is the China-ETF bogey for traders and investors. It invests at least 90% of its assets in the 25 largest and most liquid Chinese companies. The 52-week range is $22.69-$46.66, and the stock closed Friday at $37.57, off nearly 24% from its high. Since January 20th, when the Chinese government curtailed lending by major banks, shares are down $3.57 each.
Claymore/AlphaShares China Small Cap (HAO) is a non-diversified ETF that invests at least 90% of its assets in the securities of small-cap, publicly-traded companies on the Chinese mainland. The fund’s 52-week range is $10.28-$28.48, and the stock closed last Friday at $24.05, down about 16% from its high. Since January 20th the shares have lost $3.69 each.
SPDR S&P China (GXC) is a market-cap weighted index that invests in Chinese-based publicly-traded companies that are legally available to foreign investors. The fund’s 52-week range is $36.06-$76.40, and it closed Friday at $64.72, down about 15% from its high. Since January 20th, the shares have lost nearly $5 per share.
Now let’s take a look at a few ETFs that include Chinese companies, yet bet elsewhere in Asia or emerging markets for diversification.
iShares MSCI All Country Asia ex Jpn Index (AAXJ) is a non-diversified fund which invests at least 90% of its assets in securities included in the MSCI All Country Asia ex Jpn Index. The fund has invested about 17% of its assets in Chinese companies. The 52-week range for the fund is $26.69-$58.30, and it closed Friday at $50.29.
Claymore/BNY Mellon BRIC ETF (EEB) is a fund which invests at least 90% of its total assets in selected ADRs and GDRs of companies from Brazil, Russia, India, and China. Just over 29% of the funds assets are invested in Chinese companies. The shares’ 52-week range is $19.44-$44.90, and it closed Friday at $37.07.
iShares MSCI BRIC Index (BKF) invests at least 80% of its assets in securities and depositary receipts of stocks traded on the exchanges of Brazil, Russia, India and China. Nearly 23% of the funds assets are invested in Chinese companies. The fund’s 52-week range is $19.78-$48.50, and the shares closed at $40.35 on Friday.
Closed-End Funds – The “Old School” Investment Vehicles for China Exposure
As a reminder, closed-end funds can trade at large premiums or discounts depending upon market conditions.
The China Fund, Inc. (CHN) invests directly in stocks traded in Hong Kong and on mainland China. Investments are made across all sectors and market caps. The largest single share of the fund, 22.2%, is invested in Taiwanese equities, and a combined 32% of the fund is invested in Hong Kong. Direct and equity-linked investments in mainland China total about 27% of fund’s assets. The 52-week range is $13.90-$30.25, and shares closed Friday at $25.62, a discount to the net asset value as of January 29th of $29.07.
The Greater China Fund, Inc. (GCH) invests directly in the public equity markets of China. Almost 69% of assets are invested in mainland China, with about 25% invested in Hong Kong, about 2% in Singapore and 3% in Taiwan. The 52-week range is $6.46-$14.78, and shares closed Friday at $11.57, a discount of nearly 12% to the NAV on February 4th.
Morgan Stanley China Fund (CAF) is a non-diversified fund which invests at least 80% of its assets in the A-shares of Chinese companies listed on the Shanghai and Shenzhen stock exchanges. The fund’s 52-week range is $23.00-$39.63, and shares closed Friday at $26.50. The fund’s net asset value on February 5th was $28.17, a discount of about 6%.
WisdomTree Dreyfus Chinese Yuan Fund (CYB) is a non-diversified fund that seeks returns based on money market rates available to foreign investors in China and changes in the value of Chinese currency relative to the U.S. dollar. In short, you get to buy the Yuan or Renminbi, and volatility here is generally lower than in most ETF or ETN products. The fund’s 52-week range is $24.83-$26.55, and the shares closed on Friday at $25.21. Net asset value on February 25th was $25.20.
The Chinese government is scared to death that inflation will result from the nearly uncontrolled lending that was happening since the beginning of 2010. The Bank of China has indicated that its loan growth for 2010 will be about half the 32% growth in 2009.
The fear is that banks will make too many loans that will turn out to be non-performing, forcing the government to step in and make the lenders whole. It would not be the first time that has happened in China, but it’s a pattern that the government has tried very hard to break.
Absent the easy lending and the increased capital reserve requirements, Chinese firms are faced with slowing growth. Chinese-based funds will feel the pinch too.