China ETFs rally despite euro saga
Chinese equity ETFs have rallied impressively over the past six weeks, shrugging off Europe’s ongoing debt problem and pushing many through their 50-day moving average. The London-listed iShares FTSE China 25 ETF is up almost 29%; other China ETFs have posted similar returns.

Chinese equity ETFs have rallied impressively over the past six weeks, shrugging off Europe’s ongoing debt problem and pushing many through their 50-day moving average.

While China bulls regularly emphasise the country’s tendency to outperform when the rest of the world is struggling, this latest rally points to a positive shift in market sentiment and could signal the beginning of a more sustained trend.

According to Anthony Bolton, who runs a China equities fund for investment group Fidelity, periods of intense volatility on Chinese stock markets, such as we have seen over the past month or so, often indicate an inflection point in the direction of Chinese stocks. He believes the catalyst for this change in trend could be the prospect of a looser interest rate policy.

The authorities in China certainly seem to have scope to unwind the tightening. China’s economy has slowed markedly in recent months, with PMI falling from 51.2 in September to 50.4 in October, its lowest level since February 2009.

This slowdown comes after concerted efforts by Chinese authorities to cool the economy, including three interest rate hikes this year alone. However, with the domestic picture stabilising and consumer price inflation slowing to 5.5 percent in October from a three-year high of 6.5 percent in July, these efforts seem to have delivered their objective: the release of excess heat in the economy.

Monetary easing augurs well for Chinese equities
Premier Wen Jiabao has already hinted at loosening to help stimulate economic growth and there is increasing speculation that the government will cut banks’ reserve requirement ratios or introduce more fiscal measures to bolster growth as inflation continues to ease.

Indeed, recent news flow suggests policy loosening may have started. Data showed that the number of loans made by Chinese banks jumped in October by the most since June. Bank loan growth is a positive sign and indicates that the government may be relaxing curbs on lending.

In addition to that, the government has announced measures to help small businesses through easier access to bank loans and said it will lower the threshold for payment on value-added and business taxes for small companies.

There are also reports that some Chinese banks had their loan quotas increased for November, and new bank loans may exceed 600 billion yuan ($94.6 billion) this month and next and full-year loan growth may reach 7.5 trillion yuan.

This controlled easing cuts the probability of a hard-landing and has led Goldman Sachs to advise its clients to buy Chinese stocks.

Goldman Sachs goes bullish on China
“We are recommending a long position in Chinese equities,” Goldman Sachs strategists said in a research note. “The market may be poised to continue to shift from the pricing in of hard-landing scenarios to the pricing in of some policy-driven relief and reacceleration.”

“Chinese growth has clearly slowed, as the most recent PMI data further illustrate,” the Goldman Sachs strategists said. “However, the slowdown remains mild, we expect close-to-trend growth to resume in the coming quarters.”

Fidelity’s Bolton, too, is cautiously bullish. He expects things to calm down in Europe over the next six to 12 months and when things do he predicts that investors will be more prepared to rebalance their portfolios, with flows moving from the developed world to markets like China.

For investors looking to gain exposure to Chinese equities, there is a growing list of low-cost ETFs to choose from.

FTSE China 25 Index
The FTSE China 25 Index measures the exposure to the 25 largest and most liquid Chinese stocks (Red Chips and H shares) listed and trading on the Hong Kong stock exchange.

iShares FTSE China 25 ETF

DB X-tracker FTSE China 25 ETF

EasyETF FTSE China 25

MSCI China Index
The MSCI China Index measures the performance of the top 85% of equities by market capitalisation in the Chinese equity markets.

Source MSCI China ETF

HSBC MSCI China ETF

DB X-tracker MSCI China Index ETF

Hang Seng China Enterprises Index
The Hang Seng China Enterprises Index (HSCEI) consists of companies registered in the People’s Republic of China and listing on the Hong Kong Stock Exchange.

Lyxor ETF China Enterprise

FTSE RAFI Hong Kong China Index 
The FTSE RAFI Hong Kong China Index is designed to track the performance of the largest Hong Kong companies on the FTSE RAFI Hong Kong China Index based on the following four fundamental measures of firm size: book value, income, sales and dividends.

PowerShares FTSE RAFI Hong Kong China ETF

CSI 300 Index
The CSI 300 Index measures the performance of 300 stocks traded on the Shanghai and Shenzhen stock exchanges.

CS ETF (IE) on CSI 300

DB X-tracker CSI 300 Index ETF

MSCI Emerging Markets Asia
The MSCI EM Asia Index measures the equity market performance of approximately 8 emerging markets in Asia. As at 30/9/2011 China has a weighting of 28.35%.

CS ETF (IE) on MSCI EM Asia

Amundi ETF MSCI EM Asia

SPDR MSCI EM Asia ETF