China has been making headlines lately and since what happens to the dragon increasingly affects what happens to global markets around the world, it’s worth paying attention to these accelerating and important developments.
Recent developments include:
- China consumer prices surged 4.4% in October on an annualized basis, far above forecasts.
- Food prices accelerated 10% in October, which is substantial since food can account for as much as 50% of annual budgets in emerging economies.
- China on Friday raised its reserve ratio for banks by 0.5% and chances for an imminent interest rate hike are growing hourly.
- Federal Reserve Chairman Ben Bernanke went on attack against China for keeping its currency at low levels while last week, China attacked the U.S. in Seoul for its expanded quantitative easing policy which has worsened the Chinese inflation problems.
- The Shanghai Composite (SSEC) has lost more than 9% of its value in the last six trading days, potentially troubling for global indexes as many analysts now look to Shanghai as a leading indicator for trends in equity prices.
So here we have the world’s second largest and fastest growing economy facing surging inflation and the problems associated with rising food prices that could lead to social unrest and pain for its vast population.
To counteract inflation, the Chinese government has already taken significant steps to slow the economy and an interest rate hike would be the next logical move to battle inflation and slow the pace of economic growth. This would also likely lead to slower exports and a decline in the Shanghai Composite which could easily further dampen economic and investment activity in the developed world.
Investors who believe that China is going to be forced to slow their economy down to combat inflation have several options to consider to profit from this situation.
The most obvious is (NYSEArca: FXP) the ProShares UltraShort FTSE/Xinhua China Exchange Traded Fund. It has an expense ratio of 0.95%, has over $250 million in assets under management and averages more than 500,000 shares per day.
Other ETF options for inverse exposure to China are the Direxion Daily China Bear 3X ETF (NYSEArca: CZI) or the ProShares Short FTSE/Xinhua China ETF (NYSEArca: YXI) which offers single 1X inverse exposure to China but is a low volume and less liquid exchange traded fund.
Outside of direct exposure to China, one could also look to markets that would be affected by a slowdown in China. One of the most obvious is oil and an inverse oil etf is (NYSEArca: SCO) the ProShares UltraShort DJ-AIG Crude Oil exchange traded fund. This fund trades opposite to and at double the rate of the Dow Jones UBS Crude Oil sub-Index and oil prices could be expected to decline as China’s economy slowed and demand receded.
So it’s very likely that China will continue making headlines and that its impact will be felt around the world as it continues to grow as an economic power. If China does indeed enter a slowdown or slower growth period, there will still, as always, be opportunities to profit using the flexibility and power of exchange traded funds.
John Nyaradi is the author of Super Sectors: How To Outsmart the Markets Using Sector Rotation and ETFs.