Tuesday, October 20, 2015

Two better ways to play Chinese growth

The WSJ recently featured an article about the silver lining in Chinese growth. Even though the GDP growth rate had fallen below 7% to 6.9%, there was evidence of rebalancing away from the same-old-same-old lending based model of infrastructure spending to the household sector (emphasis added):
There is robust growth in China if you know where to look, some contrarian investors believe.

Monday’s gross-domestic-product report offered the latest sign that the world’s second-largest economy is slowing. But the gloom is overdone, said some portfolio managers who are focusing on the nation’s booming service sector.

Their purchases amount to a bet on Beijing’s efforts to engineer an economic rebalancing, toward a consumer-led, service-driven economy from one dominated by manufacturing and trade. While slowing Chinese economic growth and declines in the country’s use of materials such as copper, nickel and cement have rippled through financial markets, some traders say some less-publicized metrics paint a more upbeat picture.

To name a few, box-office sales are up more than 50% this year, Internet traffic through mobile devices has nearly doubled and railway passenger traffic and civil aviation are increasing steadily, government data show.

The most recent numbers highlighted the Chinese economy’s increasingly dual nature. China reported its economy expanded at a 6.9% annual rate in the third quarter, its slowest pace since the global financial crisis. At the same time, the services sector expanded 8.4%, accounting for more than half of China’s GDP growth for the first time, according to official statistics.
For years, US investors have either bought FXI or commodity related vehicles as a way to play Chinese growth. Now that there is growing evidence of growth rebalancing, those vehicles may not be the most appropriate anymore.

Consider this chart of two "New China" vs. "Old China" pairs.


The first is a long position in PGJ (NASDAQ Golden Dragons Index) vs. short position FXI (FTSE China 50), which is depicted in black. The Golden Dragons Index is far more heavily weighted in consumer services and technology, which are also consumer e-commerce oriented (think Baidu, etc.), while the FTSE China 50 Index is tilted towards financials, which represent "Old China" finance and infrastructure plays.

The second pair is a long position in CHIQ, Global X China Consumer ETF, and a short position in CHIX, Global X China Financials ETF, depicted in green.

In both cases, these pairs tell the story of progress of growth rebalancing towards the consumer sector of the economy. Even if you don't want exposure to China, monitoring these pairs is a useful way of seeing how rebalancing is progressing in real-time.

4 comments:

Anonymous said...

But that's only relative performance. Old china is getting killed. That doesn't mean they're rebalancing.

Unknown said...

Well said, thank you.
What is the status of paid subscriptions to your writings?

Unknown said...

Thank you.
Well said.
What is the status of your paid subscriptions for your writings.
Thanks

Cam Hui, CFA said...

Fritz - We are aiming for a December 1 launch. I will have more news in early November.

Anon - Relative performance counts. That's why I was referring to these to pair trades.