Much has been said about the crashing Chinese economy and China stocks, which is why we have been investigating extra hard to find evidence of this so-called “crash.”  So far, other than extreme divergence between A- and H-shares brought on by the record volume of mainland IPOs, we have found no evidence of the supposed arrival of such economic collapse in China.

And as we keep looking, we increasingly find evidence of the opposite — this still looks like a normal policy-driven slowdown in mainland China. Here is one more piece of the puzzle: Chinese small caps are doing great.

As luck would have it, we have an ETF that follows this sector — the Guggenheim China Small Cap ETF (NYSE: HAO). This is nicely illustrated by plotting the year-to-date performance of HAO along with that of the H-shares of mainland Chinese companies as represented by the iShares FTSE/Xinhua China 25 ETF (NYSE: FXI) as well as the Shanghai Composite index.

HAO was trading roughly in tandem with FXI until the July when the Shanghai Composite bottomed, at which point it begun to notably outperform — this is significant, in my view. Small caps are the best way to understand the true health of any stock as they have a tendency to show the real economy. An overall weak stock market with great relative strength from small caps is one where investors should look to buy (this is what we have in China right now). A stronger large-cap index that is accompanied by notable weakness in small caps is dangerous (this is what we had in the U.S. in early 2000).

To be fair to HAO, the vast majority of mainland Chinese small caps are H-share listed companies in Hong Kong (with very few exceptions) with less than $1.5 billion in market cap. And considering that there are very few ADRs for the companies that are part of this ETF, it does provide a valuable tool for investors that seek exposure to the sector.

The ETF is overweight Chinese cyclical sectors such as industrials, consumer discretionary, materials, information technology and financials. If the Chinese economy was crashing, as some have suggested, such cyclical sectors would not be doing as great. There are 156 stocks in the ETF, with the largest being weighted 2.5% — so as far as a broad ETF that covers the Chinese small-cap space, HAO fits the bill to a T.

Guggenheim Funds has another interesting ETF that tells a similar story — the China Real Estate ETF (NYSE: TAO). This ETF is largely made up of Hong Kong real estate companies, which are very different than the mainland-concentrated real estate companies that the PBOC is targeting. This is because Hong Kong has a monetary policy that is more tightly-linked with the U.S., due to the hard currency peg implemented in 1983.

While TAO is also doing well, it is more of a proxy for Hong Kong real estate. Still, those real estate companies have (in some cases large) operations in mainland China, which should be affected by further tightening of PBOC policy. I would stay away from TAO for the time being and focus on any correction in HAO as a buying opportunity.

The PBOC is likely to continue to tighten gradually which should keep real estate companies underperforming the major averages, but based on everything we have seen so far and discussed, our bet still remains that this will only slow the Chinese economy for a soft landing and a return to more sustainable growth.

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