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How To Invest During The Chinese Economic Slowdown


Chinese Economic SlowdownWith China’s economy showing signs of slowing, it is time to figure out how to invest during the Chinese economic slowdown.  An economic slowdown in China does not mean a recession.   It means a lowered growth rate.   China has been growing between 7 and 12 percent for the past two decades. If economic forecasts are correct, China will grow between 5 and 7 percent over the coming year, and perhaps beyond. While many governments would welcome 5 and 7 percent annual economic growth, for China it is sub-par growth that could lead to implications not only for those invested in Chinese stocks, but also for Western companies that do business in China and derive some of their revenue and earnings from Chinese operations. The stocks of these companies may take a hit, if the Chinese economic slowdown is more severe than expected or if it turns into an economic panic.

Investing During The Chinese Economic Slowdown | The Options

Knowing that China’s economy is slowing down, what are the options one can consider to invest during the Chinese economic slowdown? There are essentially three options. 1) Do nothing and remain fully invested. 2) Pare back holdings of Chinese stocks and fixed income products until the economic picture in China becomes clearer.   3) Sell all investments in Chinese stocks and fixed income products and sit on the sidelines.

China Economy SlowingAs can be expected, financial experts are split regarding which option is the soundest one to choose in reaction to the Chinese economic slowdown. What it really comes down to is whether one sees the current Chinese economic slowdown as something that is temporary and fleeting or as the beginning of a more protracted and serious slowdown. For those in the camp that think this is just a blip in a long trend of strong economic growth in China, options 1 and 2 make the most sense. For long-term buy and hold investors, option 1 is the preferable option.   For those that are more inclined to trade the stock market, option 2 makes more sense.

Option 3 makes sense if one believes that China has too many economic strains, such as a large shadow banking system, to make it through this slow down unscathed. The reality is that China has taken on an incredible amount of debt over the past decade, including a lot of debt that is hard to quantify, because it is held in the murky shadow banking system that operates outside of the state regulated banking system. Those that think China’s economy is heading for a sharp economic slowdown tend to believe that the high levels of debt in China will cause any economic slowdown that materializes to grow far worse over time, as debt defaults cascade through the Chinese economy.

How To Invest During The Chinese Economic Slowdown

As an individual investor either invested in China or considering making an investment in China, how should one react to the Chinese economic slowdown?

If you are a truly long-term investor, then option 1 makes the most sense. A slowdown in China would likely cause a sell-off in Chinese stocks and fixed income products; however, if one is invested for the long haul, then the focus should be on future economic growth in China. Use any sell-off that materializes to add to positions, if you are seeking to increase investment exposure to the Chinese economy.

If you are more of a medium-term swing trader or short-term momentum trader, then option 2 or 3 would be the best course of action. Of course, nobody knows for certain how an economic slowdown in China will eventually play out. The Chinese central bank and government could take drastic measures to boost the Chinese economy, which would likely boost Chinese stocks and fixed income products. Conversely, if their efforts are not successful or if a debt crisis unfolds, then a sell-off in Chinese stocks and fixed income products could be severe and long lasting.

Just keep in mind that the best time to invest in any economy that is suffering from a slowdown is towards the middle of the slowdown, when the economic statistics are bleak, but appear to be nearing a bottom. Stock markets are notorious for beginning a new rally in the middle of a recession, and China’s stock markets will likely follow this same course.

How To Invest China

Invest In ChinaThe following are some ideas regarding Exchange Traded Funds (ETFs) that can be used to invest in China. Some are leveraged and one takes a short position on Chinese stocks, so keep this in mind as you do your due diligence on these Exchange Traded Funds.

iShares China Large-Cap (FXI) is an ETF that tracks the investment results of the FTSE China 50 Index, which is made up large-capitalization Chinese equities that trade on the Hong Kong Stock Exchange.

SPDR S&P China (GXC) is an ETF that tracks the performance of the S&P China BMI Index.

Ultrashort FTSE/Xinhua China ETF (FXP) is a short-oriented ETF that is designed to trade at two times the inverse (-2x) of the daily performance of the FTSE China 50 Index.

China Small Cap ETF (HAO) is an ETF designed to mimic the returns of a small capitalization company index called the AlphaShares China Small Cap Index.

FTSE China Bull 3x Shares ETF (YINN) is an ETF designed to trade at three times (300%) of the performance of the FTSE China 50 Index.

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