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China ETFs Surge on Premier's Growth Pledge

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Long a top destination for foreign capital, China has begun to fall from its lofty perch this year. The country has seen its economy fall below the important 8% annual GDP growth mark, with current gains coming in at roughly 7.5%.

Plus, concerns are beginning to mount over local debt levels, ghost cities, and the ability of the country to balance out its economy for the long haul. These worries, along with general disdain for emerging markets and a focus on U.S. stocks have led to some heavy losses in Chinese equities, with the prediction of more losses a popular view as well.

This is particularly true given that Chinese policy makers have been less-than-supportive lately, such as in the credit market. In this corner of the economy, China has allowed credit to tighten, squeezing growth while pushing up rates in the interbank market in the process (see China ETFs Tumbling on Fears of Credit Crunch).

This has pushed pessimism regarding Chinese investments to a new level, as many were starting to believe that the country would stand by and watch as its banking sector faced some serious trouble. However, recent reports from the top echelon of China’s government have suggested that this will not be the case and that more government support is ahead for the Chinese economy.

Growth Pledge in Focus

Recently, the Premier of China, Li Keqiang, said that ‘The bottom line for economic growth is 7%, and this bottom line must not be crossed’. He also declared that "As long as the economic growth rate, employment and other indicators don't slip below our lower limit and inflation doesn't exceed our upper limit we'll focus on restructuring and pushing reforms."

In addition to this, a new plan to push more money to railways and other infrastructure programs was announced, suggesting that this will be a focus of any new stimulus package. Beyond these transportation-focused sectors though, many are looking for more spending to be pushed towards green energy programs, water projects, and technological infrastructure, according to the Telegraph.

Market Impact

Though it remains to be seen if this seven percent target can actually be defended with any new programs, it is certainly encouraging to see that China appears to be tackling this growth issue head-on. Chinese securities appeared to feel the same way about the issue, as individual stocks and China ETFs all surged on the day (see all the Top Ranked ETFs).

Below, we highlight some of the biggest winners from this pledge in the ETF world, all of which surged at least 2.7% on the day:

The top China ETF, the iShares China Large Cap ETF (FXI - Free Report) added about 2.8% on the session, continuing the recent solid run for the ETF. FXI also saw elevated volume for the session, with close to 23 million shares moving hands on the day, about five million more than normal (see The Right and Wrong Ways to Invest in China ETFs).

Beyond that, investors also saw some of the more specialized—but thinly traded—China ETFs surged by even more than that on the day. These include the following funds, most of which focus on small cap securities, or corners of the market which look to be more impacted by the recent trends:

(PEK - Free Report) - This ETF focuses on the A-Shares market, a subset of the Chinese stock market that is usually only available to Chinese investors. U.S. investors can gain exposure to the segment by using funds like PEK which use swaps and other derivative instruments in order to deliver similar returns. The ETF added about 4% for the session, though volume was pretty light—even for its standards.

(CHIX - Free Report) - This ETF follows a benchmark of Chinese financial companies, holding about three dozen in its basket. Financials could have been helped by the pledge as it does suggest some more support for the sector from the Chinese government, especially if things get out of hand in the near future. The ETF added about 3.8% for the day on volume that was double the normal amount (also see Inside the Surging China Technology ETFs).

- Arguably the biggest beneficiary of the announcement was this infrastructure-focused ETF. That is because the component stocks in this fund could see high demand for their services, especially if spending tilts to different infrastructure corners of the country’s economy. Thanks to this, the ETF added about 4% on the session, on volume that was a bit higher than normal.

Bottom Line

China investing has been pretty dicey for much of 2013 as worries have begun to crop up over the nation’s short term health. This nearly came to a breaking point recently when interbank rates spiked, though tensions have cooled recently.

Now, thanks to a promise for 7% growth and the possibility of more stimulus, China could see some stronger interest in its securities, especially if they are successful in rebalancing the economy, even just a little bit away from the heavy industry sectors (also see 3 Hot Sector ETFs Surging to #1 Ranks).

If this happens, the aforementioned China ETFs could be interesting picks, though there looks to be considerable volatility in the near term as China, like many other emerging markets, fights through this current rough patch and struggles to return to a solid level of growth.

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