Will Buying Spree Boost China ETFs?

by on May 28, 2009 | ETFs Mentioned:

There’s an old adage that rings true in our current economic environment: crisis begets opportunity. I don’t think anyone would argue that we’re deep into a crisis that has proved to be more prolonged and more severe than most predicted. Until now, however, we’ve yet to see a wave of buyers snatching up companies with strong business fundamentals that have been battered by the deepening recession. It seems that’s beginning to change, as opportunistic buyers have begun emerging from a familiar source of growth: China.

Buying in a Buyers Market

In the last week, a number of cash-rich Chinese companies and individual investors have made a number of high profile acquisitions on the international stage. Consider:

  • YGM Trading Ltd. confirmed it has signed a letter of intent to acquire Aquascutum Group Plc, a UK-based fashion label. Aquascutum was founded 158 years ago, and has been a favorite of British royalty and actor Pierce Brosnan.
  • Aluminum Corp. of China (Chinalco) has proposed a $19.5 billion investment in Australian mining giant Rio Tinto, consisting of $7.2 billion of convertible debt and $12.3 billion of equity stakes. If approved (which is not certain – Rio Tinto is battling shareholder and political opposition), Chinalco’s stake in Rio Tinto could double to 18%.
  • PetroChina has proposed a $1 billion purchase of a minority interest in Singapore Petroleum. As David Winning writes in the Wall Street Journal, PetroChina has previously relied on its state-owned parent, China National Petroleum Corp., when expanding overseas, but seems ready to “go it alone” with its latest acquisition.
  • Earlier this month, PetroChina secured a deal with Venezuela to jointly build a new factory in southern China to process Venezuelan crude oil, weeks after signing a 25-year deal to import Qatari liquefied natural gas.
  • In perhaps the most high profile acquisition, a group of Chinese investors is reportedly interested in acquiring a minority interest in the Cleveland Cavaliers. According to numerous sources, Hong-Kong based conglomerate New World Development Co. may be close to gaining a 15% interest in the pro basketball team from current owner Dan Gilbert.

Still Bargains to be Had

Although complete terms of these deals are not readily available, it seems that several of the potential targets have encountered difficulties attracting interested investors or buyers. Despite recent rallies, there remains no doubt that for those with the resources, there are excellent bargains to be had. Cash-rich Chinese companies and investors are suddenly exhibiting a greater willingness to take gambles if the price is right, and, for the most part, they’re encountering little competition.

Are China ETFs a Buy?

Moreso than any other country, Chinese investors appear to be taking advantage of the worldwide buyer’s market, reaching beyond their borders and expanding their global presence in high profile industries. China, once known for its closed borders and protectionist policies, has gradually opened its borders to foreign investment, and the last week shows that the country is continuing to integrate itself into the international markets.

Given the flurry of deals involving Chinese investors while others continue to wait cautiously on the sidelines, I’m increasingly bullish on ETFs offering exposure to the Chinese markets. When we pull out of the global recession, those investors who were able to buy near the bottom will likely emerge as the winners of the downturn. Here’s a look at a few China ETFs out there:

  • iShares FTSE/Xinhua 25 Index (FXI): This ETF seeks to replicate the performance of the FTSE/Xinhua China 25 Index, a collection of 25 blue chip stocks weighted heavily towards financials.
  • PowerShares Golden Dragon Halter USX China Portfolio (PGJ): For investors not wanting to allocate a significant portion of their portfolio to Chinese equities, PGJ offers exposure to the Chinese market through U.S.-based equities. This ETF tracks the Halter USX China Index, which is comprised of U.S.-listed companies that derive a majority of their revenue from China.
  • ProShares UltraShort FTSE/Xinhua China 25 (FXP): For those of you who couldn’t disagree with me more, FXP offers leveraged inverse exposure to the FTSE/Xinhua China 25 Index. Since this is a leveraged ETF, it may be inappropriate for cautious or novice investors.