Case For The China Consumer ETF

by on July 9, 2010 | ETFs Mentioned:

For much of 2010, global equity markets have taken their cues from Europe. But recent news out of China has put the spotlight back on the world’s largest emerging market (and soon-to-be second largest economy). The country appears to be focused on trimming a red-hot growth rate of nearly 12%, which is seen by many as fuel for a bubble, down to 9%. While still an impressive growth level by any measure, reports of these intentions have quickly rippled throughout global markets, weighing on a wide variety of assets that rely on robust levels of Chinese growth. One example is the iPath DJ-AIG Copper ETN (JJC); this note is down about 17% over the last three months. This freefall is largely due to the insatiable demand that China has exhibited for the metal; it now consumes upwards of 40% of the global copper output. So when the Chinese economy appears to be slowing down, the impact is felt around the world [also read Beyond FXI: Three Alternatives To The Popular China ETF].

Although the Chinese economy appears to be slowing down to more realistic levels of growth, some sectors look to continue to surge ahead. One interesting area is the Chinese consumer sector, which could surge despite the ‘slow down’ thanks to labor issues and a rising yuan.

Many factory workers across China have seen wages soar higher in recent weeks, as a rash of suicides at several plants brought increased focus to strikes and protests that ultimately forced many companies to raise wages by as much as 40%. Additionally, early last week the Chinese government announced that it would let the Chinese currency rise against the dollar for the first time in years. Although the rise was modest, it could signal the beginning of the end of the currency peg, which could allow the yuan to rise by as much as 35% to what many Western analysts believe would be fair value levels [see Which Chinese Yuan ETF Is Best To Play Currency Revision?].

These developments are likely to cut into many Western retail firms’ profits, but could have a huge positive impact on Chinese consumers who have historically been hesitant to spend liberally. But armed with increased wages and a stronger currency, China’s middle class may see its disposable income rise to record levels. That may just be the shot in the arm to boost private consumption from its current level at 35% of GDP to at least the 46% level touched in 2000.

CHIQ Set To Surge?

If Chinese consumers finally start to spend more freely, it could be a big boost for companies operating in the consumer discretionary sector. For U.S. investors looking to access this sector, the China Consumer ETF (CHIQ) from Global X might make an interesting play. The fund tracks the S-BOX China Consumer Index, a benchmark designed to reflect the performance of the consumer sector in China. This index is made up of companies which have their main business operations in the consumer sector and are domiciled in China or have their main business operations in this country. The fund has a heavy focus on large cap firms (63%) while mid caps (28%) also make up a substantial portion of the total assets. CHIQ holds 40 equities in total, and is relatively well-spread out; just under 48% of total assets go towards the top ten holdings. Some of its top holdings include China Yurun Food Group (5.6%), Li Ning (5.3%), and Air China (5.1%), all of which look to benefit from increased spending from Chinese consumers [see more of CHIQ's holdings here]. The fund has been relatively flat thus far in 2010, posting a gain of about 2% on the year. CHIQ charges an expense ratio of 0.65%.

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Disclosure: No positions at time of writing.