China ETFs Drop After Inflation Report

by on July 9, 2013 | ETFs Mentioned:

Monday marked the unofficial start of Q2 earnings season with heavy hitter Alcoa (AA) setting the stage. Analysts were not surprised with the reported $119 million loss in the second quarter, with many analysts coming into earnings season with low expectations. The night following AA’s earnings announcement, investors turned their attention away from the U.S. to China and the released consumer price index report [see S&P 500 Visual History].

Underscores Weakening Economy

ChinaThe latest national consumer price index, compiled by the National Bureau of Statistics of China, came in slightly above analysts’ expectations. After May’s surprisingly low 2.1% change in the price of consumer goods and services, June’s 2.7% may be great for the currency, which is a big concern for consumers and the future growth of China’s economy.

Consider the trailing six-month CPI data below and note that the change is calculated from the price of goods during June of 2012 [see also China ETFs Tumble After Disappointing Flash Manufacturing Data]:

The latest data indicates consumer prices are 2.7% higher than they were a year earlier, which is still a slow rate of increase compared to June 2011 (6.4%). Since the highs of 2011, consumer prices have slowed significantly, along with with the general economy of China.

China ETFs Performance Recap

Since the start of the emerging market exodus, China ETFs have lost investor momentum and funding. This once necessary portfolio piece is now being avoided by the majority like a plague while the negative reports for China continue to dig the hole deeper. Consider the  year-to-date performance of the largest ETF covering this sector, the FTSE China 25 Index Fund (FXI, B-), versus the broad U.S. market as represented by SPY [also see How To Be A Better Bear: Short Selling vs Inverse ETFs]:

FXI - Stock Price Chart for FTSE China 25 Index Fund Ishares

click to enlarge

FXI has managed to not only lose more ground in 2013, but has also significantly lost investor inflows over the same short time period. While the U.S. continues to make small steps towards recovery, China is just starting to feel the credit crunch and recession the economy was able to power past earlier this decade.

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Disclosure: No positions at time of writing.