ETF XRAY

China Inflation Red Flag for ETFs

By Carl Delfeld of the Chartwell ETF Advisor

The deflationary impact of China on world markets is now turning into an inflationary red flag with important implications for China ETFs like iShares MSCI ChinaFXI.

Wages have started rising rapidly, energy prices remain high and food demand is exploding. Fresh evidence emerged in February as China’s National Bureau of Statistics said that inflation jumped to 7.1% percent from 6.5% in December. The Chinese stock market today took a hard fall today of -4.11% and on concern about U.S. demand after last Friday's weak US payroll report.

The Chinese stock market is also nervous about tomorrow's Chinese February CPI report which is expected to rise to a 11-year high of +7.9% from +7.1% in January and possibly spark another rate hike from the Chinese central bank. China’s consumer price index reached an 11-year high in January of 7.1% year-on-year

Rising inflation is forcing Chinese manufacturers to try to defend their slim operating margins by raising prices for exported components which, in turn, will compress multinational margins since it is difficult in a weak economy to pass on higher input prices (such as energy, components and raw materials) to consumers in markets like Japan, America and Europe.

Learn how you need to adjust to China's changing environment by joining Chartwell ETF.

China ETFs Still On Expensive Side

By Carl Delfeld of the Chartwell ETF Advisor and ETFfolio.com

China exchange-traded funds have been amongst the hardest hit ETFs this year. Valuations are difficult to pin down but consider the "A" share market of shares available to only Chinese citizens and certain institutional investors. The only option for these shares is the Morgan Stanley A share fund (CAF) which normally trades at a 30% discount to NAV.

These domestically listed shares are trading on 37 times this year’s earnings which means they are still the world’s most expensive.

But it gets worse if you consider the quality of earnings and the likelihood that growth, margins and profits will likely be rated down in the near future. Morgan Stanley reckons investment and non-operational income contributed 21 per cent of third-quarter EPS for non-insurers. The Financial Times reports that the bluer chip MSCI China index of companies listed abroad has forecast EPS growth of 22 per cent. Of this, 8-10 percentage points is from renminbi appreciation and 5-7 percentage points from an effective cut in corporate taxes.

So despite the fallback in prices, p/e's for the Shanghai market are still very high, the quality of earnings is relatively poor and projections of forward earnings are likely to be geared back as global growth slows.

Perhaps you need to learn more about the China Strategy ETFfolio or join Chartwell ETF to stay on top of the China story.

The New Hao China Smaller Company ETF

By Carl Delfeld of the Chartwell ETF Advisor

The Claymore/AlphaShares China Small Cap Index ETF (AMEX: HAO) began trading this week offering yet another way to get at the China growth story.

Claymore's HAO ETF has an expense ratio of 0.70%. It includes about 120 different companies all weighted by market cap. The benchmark sets a minimum market-cap size of $200 million and a maximum of $1.5 billion and no one company can exceed 5% of total exposure.

Smaller companies tend to be privately owned which is an advantage but valuations still appear pricey. The average p/e ratio is 35 and average price to book of companies in the index is 4.2. The HAO ETF is also trading at a 6% premium to NAV.

Below are the ten top holdings.

BEIJING ENTERPRISES HOLDINGS 2.99 %
CHAODA MODERN AGRICULTURE 2.89 %
SINOFERT HOLDINGS LTD 2.40 %
WUXI PHARMATECH INC - ADR 1.98 %
CHINA SHIPPING CONTAINER 1.96 %
SOHU.COM INC 1.96 %
NETEASE.COM INC-ADR 1.93 %
SHANGHAI JIN JIANG INTERNATIONAL 1.84 %
CNPC HONG KONG LTD 1.76 %
JIANGSU EXPRESSWAY CO LTD 1.75 %

For advice on the best way to invest in the China story, go to Chartwell ETF.

Jim Rogers Move to "China": Sell or Buy Signal?

By Carl Delfeld of the Chartwell ETF Advisor

On CNBC last Friday afternoon, Jim Rogers confirmed that he has scheduled a closing on his townhouse in New York City and is uprooting his family, and moving to Singapore in order to participate first-hand in the great Chinese economic boom. He's also raising his child as bi-lingual in Chinese.

Rogers minced no words expressing his distaste for American equities and the American competitive position in the global economy going forward. He said the U.S. dollar will not be the world's reserve currency for long and is apparently gaga over China's economic boom and stock market.

China is without a doubt an exciting growth story but could this high profile move signal something else?
In a recent message to Chartwell ETF members , I outlined eight China risks that could derail its juggernaut economy and perhaps its stock market as well. Here they are:

Valuation Risk

Banking/Credit Risk

Resource Price Risk

Taiwan Risk

Trading Partner Risk

Inflation Risk

Beijing Olympic Risk

Political Risk

For a description of each risk and what it could mean for your portfolio, join the Chartwell ETF Advisor.

And for a polar opposite to Mr. Roger's pessimism, see my "America Sunny Side Up" article as well. One more interesting observation. I noticed that Mr. Rogers chose to move to Singapore and not mainland China. I wonder why?

Chinese Inflation Could Rattle Market & ETFs

By Carl Delfeld of the Chartwell ETF Advisor

Inflation, especially food inflation, has been a reoccurring problem in Chinese history with price controls tried unsuccessfully over the centuries time and time again. If the government tries this tack again, it will likely hit China ETFs like the iShares FTSE/Xinhua China 25 (FXI) and the SPDR S&P China (GXC).

Chinese inflation reached an 11-year high of 6.9% in November, a level that will harden Beijing’s resolve to tighten monetary policy and probably further delay energy price reform. Richard McGregor in Beijing for the Financial Times cites that the annual inflation rate, which hit 6.5% cent in October, is driven primarily by food prices, which rose by 18.2% cent from a year earlier, mainly because of a shortage of pigs and rising global feed costs.

China’s trade surplus, a prime cause of excess liquidity in the economy, reached $26.3bn in November, only slightly lower than the record $27.1bn, according to figures released on Tuesday.

These numbers are disconcerting especially since China has lifted interest rates five times and reserve ratios 10 times this year, with little impact on the pace of economic growth or inflation.

For the article "China Risk 101", go to the Chartwell ETF Advisor.

ProShares Launches China Ultra Short ETF

By Carl Delfeld of the Chartwell ETF Advisor

ProShares launches today an exchange-traded fund that moves inversely to a well known index of 25 "H" shares of Chinese comopanies that trade on the Hong Kong stock exchange. The UltraShort FTSE/Xinhua China 25 ProShares (FXP) seeks daily investment results, before fees and expenses, that correspond to twice (200%) the inverse (opposite) of the daily performance of the FTSE/Xinhua China 25 Index. It has an expense ratio of 0.95%.

The iShares FTSE/Xinhua 25 ETF (FXI) fell almost 10% on Monday after China effectively reversed itself by pulling back a proposal to allow mainland citizens to buy shares in Hong Kong. On Tuesday it rebounded but Wednesday brought more selling pressure as it lost another 4.8%. FXI is still probably the best way to get at Chinese companies. FXI contains 25 of the largest and most liquid Chinese companies available to international investors and all the shares trade on the Hong Kong Stock Exchange. Eight of the largest ten companies in the index are H-shares and they collectively account for 46% of the index.

FXP needs to be used carefully since it magnifies movements in the index. Another option to hedge China exposure is to purchase a put option on FXI.

China's Market Mess

By Carl Delfeld of the Chartwell ETF Advisor

The last few turbulent days for investors in China are a glaring reminder of China’s alphabet market mess. When Chinese investors look to the rumors of government intervention for guidance on when to buy or sell stocks rather than market fundamentals, you know you have a serious problem on your hands.

First, China effectively reversed itself by pulling back a proposal to allow mainland citizens to buy shares in Hong Kong led to a sharp sell off. Second, on PetroChina’s first day of trading yesterday, while its share price almost tripled on the Shanghai exchange, its “H” share equivalent on the Hong Kong exchange fell 8%. The result: PetroChina is trading at 57 times earnings in Shanghai and 22 times earnings in Hong Kong.

Even stranger is that the Communist government for some reason continues to sit on 87% of PetroChina’s shares despite the obvious demand on the part of private investors to pay top dollar. Why not completely privatize PetroChina and use the proceeds to deal with China’s massive environmental challenges.

The recent volatility and confusion on both the Shanghai and Shenzhen markets probably has augmented the role of Hong Kong as the market of choice for global investors and I’ll bet that most Chinese individual investors would prefer to invest through it as well. National pride - this is why China’s leadership pulled the proposal to allow its citizens to invest through Hong Kong.

While the market-oriented British oversaw the Hong Kong market with a light touch, the Chinese Government sees the markets as a means to control money flows. Therefore, they have created a confusing and destabilizing alphabet soup of share classes that thwart market forces because they are not fungible due to China's heavy- handed capital controls.

First are the A-shares listed in Shanghai and Shenzhen which are available to Chinese investors and certain qualified foreign institutional investors. Next are H-shares which are for the Chinese companies listed in Hong Kong. The A-shares are trading at a sharp premium to H-shares. This seems a bit odd considering the 143 mainland companies traded in Hong Kong are generally China's largest and thought to be of the highest quality. Then there are the B-shares which are available to foreign investors and trade in US dollars in Shanghai and in Hong Kong dollars in Shenzhen.

A bit confused? It gets worse when you look at the valuations of individual companies listed in more than one market. The 42 companies actively traded in both the H-share and A-share markets are much more expensive in Shanghai and Shenzhen than in Hong Kong. The 86 companies with both A- and B-shares have the same pattern with, on average, the B-shares much cheaper than their A-share counterparts.

The repercussions of this balkanized share structure will be around for a long time. Chinese investors have jumped into A-share markets with both feet partly because they have precious little other options when it comes to parking their mounting savings. But is their a way for foreign long-term investors to take advantage of the current situation?

While the FTSE/Xinhua 25 ETF (FXI) fell almost 10% yesterday, it is still probably the best way to get at Chinese companies. FXI contains 25 of the largest and most liquid Chinese companies available to international investors and all the shares trade on the Hong Kong Stock Exchange. Eight of the largest ten companies in the index are H-shares and they collectively account for 46% of the index.

If the A-share market in China continues to be volatile and suffers a sharp pullback, I believe the H-share market will weather the storm fairly well because of the valuation gap and the likelihood that global investors will scoop up perceived bargains. If you still are hesitant you might want to hedge a bit by purchasing a put option (right to sell) FXI out as far as January, 2009. I call it China portfolio insurance.

The current market confusion in China is rich in irony. On the tenth anniversary of the turnover of Hong Kong to China rule, the open and free Hong Kong market is showcasing its traditional strengths and free market foundations.

Let the Chartwell ETF Advisor guide you through China's alphabet market mess.

China Backtracks on Allowing Citizens to Invest in HK

By Carl Delfeld of the Chartwell ETF Advisor

In a blow to the iShares Hong Kong (EWH) and iShares China (FXI), China has reversed itself again and has pulled a proposal to allow mainland citizens to buy shares in Hong Kong. This decision will dampen the recent surge in the former colony’s equities that brought its market to record highs. It also highlights what is one of the biggest risks to investing in emerging markets: regulatory risk.

Wen Jiabao, the premier, has attached four conditions to final approval for the scheme, all of which are so open-ended that Beijing could take months, if not longer, to permit it to go ahead.

The Financial Times reports that the initial proposal to allow investors to invest in the Hong Kong stock market was announced in August by the State Administration of Foreign Exchange, a body under the central bank, and sparked strong interest in the HK's share prices which in many cases trade at considerable discounts for companies that have dual listings on mainland exchanges and HK as "H" shares.

Chinese investors are eager to open up options beyond chasing Chinese stocks to extreme levels and bank acounts which offer negative real interest rates. The Shanghai Composite index is up sixfold in two years.

Learn how Chartwell ETF reacts to this breaking news as it manages its seven model ETF portfolios.

Rising Chinese and Hong Kong Currency Helps ETFs?

By Carl Delfeld of the Chartwell ETF Advisor

The Chinese yuan rose to the highest since the dollar peg was ended more than 2-years ago on speculation the Peoples Bank of China will again increase interest rates in an attempt to slow down its overheating economy. Barchart reports that the yuan rose to 7.4847, the highest since its revaluation in July 2005, as China's Q3 GDP rose +11.5% from a year earlier after expanding by +11.9% in Q2, the fastest pace in 12-years. Inflation in China rose to +6.2% in September, more than double the PBOC's target, and its stock market has almost quadrupled in value in the past year and the Shanghai Composite is up sixfold in the last two years. The PBOC is under increasing pressure to slow economic growth and curb asset bubbles plaguing its financial markets.

Meanwhile, Hong Kong's Hang Seng Index crashed through the 30,000 barrier as Hong Kong investors have been banking on a flow of billions of dollars of Chinese savings entering the stock market as Beijing gradually makes it easier for mainland investors to send money abroad.

The Hang Seng record close came after the territory’s monetary authority bought US dollars for the second time this week, as the Hong Kong dollar continued to rub up against the upper limit of its trading band.

Demand for the local currency, which is allowed to trade in a range of HK$7.75-HK$7.85 to the US dollar, is surging as capital flows into Hong Kong’s stock market. Market turnover reached HK$157.4bn ($20.2bn) on Friday. The Hong Kong Monetary Authority purchased $100m on Friday. But the HKMA said that this time banks had approached it to buy Hong Kong dollars.

How should currency issues be handled in managing your global ETF portfolio? Join the Chartwell ETF Advisor and find out now.

Buffet and Chartwell ETF Caution on China

By Carl Delfeld of the Chartwell ETF Advisor

Asian stocks today closed mixed with the Nikkei index closing -0.45%, Hong Kong closing +1.78%, and South Korea closing +2.26%. The China CSI 300 index today closed sharply lower by -4.55% after Warren Buffett on a trip to China said that investors should be "cautious" about buying Chinese stocks. The Chinese Shanghai Composite index has risen nearly sixfold in the past two years.

Speaking on a visit to Dalian in north-east China, the Financial Times writes that Mr. Buffett said he was always skeptical about markets that had risen as sharply as Chinese shares have. The Chartwell ETF Advisor recommended to members that they sell the iShares China (FXI) position in the Asian Opportunity ETF on Monday, October 18th.

“We never buy stocks when we see prices soaring,” said Mr Buffett, the renowned investor and chairman of Berkshire Hathaway, the investment group. “We buy stocks because we are confident of the company’s growth. People should be cautious when they see prices rising.”

Another bearish factor for Chinese stocks today was news that Chinese Q3 GDP remained very strong at +11.5% (Q2 was +11.9%), which suggested that another rate hike by the Chinese central bank could be forthcoming very soon.

A week ago Buffet announced that his Berkshire Hathaway had sold its entire stake in PetroChina, the Chinese oil group. Mr Buffett made the initial investment in 2003 and the share price has increased by more than seven times since then.

Learn about smart. indirect ways to tap into Chinese growth by joining the Chartwell ETF Advisor today.

China Market Shrugs Off Tightening, Sets Record

By Carl Delfeld of the Chartwell ETF Advisor

Chinese stock markets and the exchange-traded funds that track them shrugged off weekend news of another tightening in monetary policy by the Chinese central bank. China’s benchmark Shanghai stock index broke the symbolic 6,000-point mark for the first time ever on Monday, with investors enjoying a six-fold increase in a little over two years. The Shanghai Composite Index rose 2.15% to close at 6,030 points as the nation’s heavy hitters opened the 17th Communist Party Congress in Beijing.

China related ETFs such as (FXI), (GXC) and (EWH) are expected to open on a positve note trading on US markets.

Barchart reported that China raised reserve requirement another notch - The Chinese central bank on Saturday announced another increase in the reserve requirement ratio to 13% from 12.5%. The Chinese central bank has now raised the reserve requirement seven times this year and the benchmark rate five times. Yet, China’s CPI still surged to +6.5% year over year in August, which is an 11-year high.

The market is expecting China’s Q3 GDP to be reported next week at +11.5%, which is well above the Chinese government’s stated preference for GDP growth near +8% and the longer-term average of about +10%. The strong CPI and GDP figures are likely to force another Chinese rate hike in coming weeks.

Find out the best ways to play the Chinese growth story by joining the Chartwell ETF Advisor.

China, India Growth Fuels Global Economy and ETFs

By Carl Delfeld of the Chartwell ETF Advisor

While India and China economic growth translates into strong performances by exchange-traded funds such as MSCI China iShare (FXI) and the Morgan Stanley India ETF (IIF), it also helps to support global growth.

The Economist highlights this positve trend and likens it to a jet with multiple engines. Emerging markets as a whole will account for more than 50% of world GDP growth in 2007 and fully 30% of total world GDP. In addition, emerging market countries represent 85% of the world's population.

It is indeed good news that the world has found some powerful new engines in China and other emerging economies. Even as turbulent credit markets potentially trim American markets and even perhaps its voracious consumers, global growth is less dependent on the United States and is more likely to stay aloft.

The Economist article goes on to describe the power of this new motor which is powerful and hopefully enduring. For several years, emerging Asian economies have accounted for more of global GDP growth than America has and this trend, with the exception of Japan, is accelerating. In addition, this year China alone will for the first time accomplish the same feat all on its own (at market exchange rates), even if American growth holds up.

American consumer spending is roughly four times the size of China's and India's combined, but what matters for global growth is the extra dollars of spending generated each year. In the first half of 2007 the increase in consumer spending in China and India together contributed more to global GDP growth than the increase in America did. Now if America can only gain access to these growing lucrative markets, trade imbalances may disappear.

Beijing Backsliding Will Hurt China ETFs

By Carl Delfeld of the Chartwell ETF Advisor

China exchange-traded funds investing in "H" shares such as the iShares FTSE/Xinhau China 25 ETF (FXI) and the iShares MSCI Hong Kong ETF (EWH) have set a torrid pace during the last month fueled by two powerful engines. One has been the valuation gap between the "H" shares and the "A" shares which can be purchased only by Chinese and certain qualified foreign institutional investors. The other was the announcement by the State Administration of Foreign Exchange (SAFE) that it would allow Chinese investors to invest directly into "H" shares.

Since that announcement on August 20th which was anticipated by a few months by the Chartwell ETF Advisor, the benchmark Hang Seng Index has risen 26%.

But now turf battles between SAFE and the China Banking Regulatory Commission (CBRC) may result in significant backsliding on this crucial issue..

For more on this battle between those who want to open markets and the Chinese mandarins bent on controlling market forces, click here.

What is the Best China ETF?

By Carl Delfeld of the Chartwell ETF Advisor

The greater China markets and the exchange-traded funds that track them are defying the global credit squeeze and hitting new highs almost everyday. But what is the best China ETF to ride this wave?

The largest and most recognizable ETF is the $6.4 billion iShares FTSE Xinhua 25 (FXI). Its weakness is that it contains only 25 companies, almost all state-owned enterprises, and has 25% of its assets in its top three holdings which is a bit too much for my taste. Another alternative is the PowerShares Dragon Halter USX China (PGJ) which tracks a somewhat limiting index of China-related companies listed on American exchanges.

But I agree with Matthew Hougan writing in Seeking Alpha that the SPDR S&P China (GXC) fund will work best for investors over the long haul. Its underlying index includes over 150 companies domiciled in China giving investors broader exposure and hopefully lower volatility.

Dougan writes more broadly about the challenges that State Street Global Advisors is having drawing attention to its fine line up of international ETFs in a crowded marketplace. I always throw up a slide describing them when I speak on building a global ETF portfolio. Let me do my part here to highlight SSGA's international ETFs.

SPDR S&P Emerging Markets ETF (GMM) Index includes more than 1,500 companies across 26 emerging countries.
SPDR S&P Emerging Latin America ETF (GML) Index includes companies domiciled in Argentina, Brazil, Chile, Columbia, Mexico, Peru, and Venezuela.
SPDR S&P Emerging Middle East & Africa ETF (GAF) Index includes companies domiciled in Egypt, Israel, Jordan, Morocco, Nigeria, and South Africa.
SPDR S&P Emerging Europe ETF (GUR) Index features companies in countries that are nearing acceptance into the EU, including Czech Republic, Hungary, Poland, Russia, and Turkey.
SPDR S&P Emerging Asia Pacific ETF (GMF) Index includes companies domiciled in China, India, Indonesia, Malaysia, Pakistan, the Philippines, Taiwan, and Thailand.
SPDR S&P China ETF (GXC) Underlying index includes over 150 companies domiciled in China

Find out what ETFs belong in your portfolio by joining the Chartwell ETF Advisor

China ETF Shakes Off Inflation Jump and Rate Hike

By Carl Delfeld of the Chartwell ETF Advisor

China exchange-traded funds like the MSCI iShares China (FXI) and the S&P SPDR China (GXC) have churned through market volatility to hit new highs. Even in the face of 6.5% inflation numbers for August, the highest in a decade and double the target of monetary authorities, failed to derail both ETFs which ended Friday up 1.5% for the day. The chief inflation culprit is food prices which surged more than 18% year on year with a shortage of many staples such as pork.

China raised its benchmark 1-year lending rate by 27 bp to a 9-year high of 7.29% from 7.02%. That was the fifth interest rate hike this year and followed the previous rate hike by just a month. China's second quarter GDP was up +11.9%. China has no choice but to raise interest rates in order to cool the economy and inflation to try to keep the economy on from overheating. The rate hike shows once again that China's economy is in its own world and somewhat insulated from financial problems such as the subprime mortgage and banking system crisis.

The IMF has predicted that China's economy this year will contribute more to the world's economic growth that the US and emerging markets as a whole will contribute more than 50% of world GDP growth this year.

Learn about ETF strategies to tap into Chinese growth at the Chartwell ETF Advisor

Chinese Government Opens Spigot to China ETFs

As the Chartwell ETF Advisor predicted in July, the Chinese regulators will now allow Chinese investors to open accounts at Bank of China and trade securities listed in Hong Kong, whose markets, unlike the mainland’s, are integrated with the global economy.

Major beneficiaries of this change will be Chinese and Hong ETFs which contain H shares which are Chinese companies which are listed on the Hong Kong Stock Exchange. The most popular are the iShares Hong Kong ETF (EWH) which now contains about 40% H shares and the iShares China ETF (FXI) which has H shares as almost all of its 30 positions. Another choice is the SPDR S&P China ETF (GXC) which has a broader exposure to the China market.

China’s State Administration of Foreign Exchange (Safe) also said these investments, under a pilot scheme, would be exempt from a $50,000 limit on the foreign currency Chinese citizens can buy or sell every year. The lifting of this cap is crucial for this policy change to have a significant impact on markets.

The vast majority of Chinese savings is now parked in bank accounts with negative real interest rates and it is likely that at least some of this cash will take advantage of this relaxation of controls especially since Hong Kong shares trade at an attractive discount to mainland markets. China's central bank also raised its benchmark 1-year lending rate by 18 bp to 7.02% from 6.84%, which was the fourth rate hike this year. The 1-year deposit rate was raised by 27 bp to 3.60% from 3.33%.

The Financial Times predicted that investors are expected to focus on Chinese companies, which trade at an average 50 per cent discount to the mainland. Once it secures final approval from the China Banking Regulatory Commission, the new policy is likely to be expanded to other intermediaries such as banks as well as other offshore stock markets.

By Carl Delfeld of the Chartwell ETF Advisor

China's Rapid Urbanization May Lead to 100 Chicagos and 100 China ETFs

The China remarkable economic growth story is really a tale of rapid urbanization. China now has over 100 cities with a population over $1 million people and still more than half of its population lives in rural areas.

The Economist takes an in depth look at one large city Chongqing which is also called a municipality, one of only four that enjoy provincial-level status in China (the others are Beijing, Shanghai and Tianjin). It is not just a city but covers an area the size of Scotland

The article notes that its citizens like to compare their city with with Chicago and it quotes James Kynge's recent book that Chicago was “a gateway to vast and largely undeveloped lands to its west, a hub where the traffic of roads, rail lines and waterways converged, and a centre for business where ambition eviscerated risk”. Chongqing “is all of these things”.

But managing this demographic change and economic upheaval is a huge challenge. This article offers investors a glimpse of the turmoil and vibrancy of a region deep in the heart of China. If they can pull it off this very tricky transformation without political upheaval, there could be 100 China Chicago's before long.

By Carl Delfeld of the Chartwell ETF Advisor

Hong Kong ETF (EWH) at Ten Year Anniversary

As the tenth anniversary of the turnover of Hong Kong to China rule approaches on July 1st, the open and free Hong Kong market and the iShares Hong Kong exchange-traded fund that tracks it (EWH) is showcasing its traditional strengths and free market foundations.

Today the Shanghai Composite index made up of "A" shares available only to Chinese investors dove 4.5% but the rest of Asia and Europe for that matter, rather than being rattled by China uncertainty and volatility, followed the US lead and rose smartly. (Nikkei index +0.46%, Hang Seng +1.07%, Australia +1.32%). The European stock markets this morning are trading with solid gains due to yesterday's US rally. The European DJ Stoxx 50 is up +0.74% this morning.

China has created its market problem by not fully embracing free markets. Meanwhile Hong Kong, rather than being eclipsed by Shanghai, has thrived. In June 1997 mainland companies (H Shares and Red Chips)accounted for just 13 per cent of the market; today they make up almost half the market capitalization. Partly as a result of mainland issuance, Hong Kong’s market capitalisation has almost trebled to nearly US$2,000bn and its average daily trading volume is around $15 billion. The market is now trading at about 16 times projected earnings but this is nothing compared to the multiples on mainland markets.

The Hong Kong iShares ETF (EWH) has its own flavor with an emphasis on real estate and financial companies. Find out more about the best way to play the China growth story by joining the Chartwell ETF Advisor today.

By Carl Delfeld, author of "ETF Investing Around the World"

China Market Down But Asian ETFs Only Nicked

After a week where Asian markets and exchange-traded funds generally moved upward. China's Shanghai & Shenzhen 300 index made up of "A" shares today closed -4.3% after China's central bank chief Zhou Ziaochuan said that China's stock market may be overvalued and hinted at higher interest rates. But other Asian stock markets suffered much less severe declines: Nikkei -0.56%, Hang Seng -0.81%, Australia -0.83%, South Korea -0.69%. The European stock market is trading moderately lower on carry-over weakness from last Friday's US session. The European DJ Stoxx 50 is trading -0.64%.

For last week, Asian markets were generally up while the S&P 500 index lost 1.8%. The iShares China (FXI) led last week up 4.8% and 15.4% for the year. The iShares Taiwan (EWT) ETF was up 2.4% and iShares Malaysia (EWM) added 1.4% to increase its gain for the year to 32.3%. South Korea (EWY) which is up 22.4% so far this year lost 2.3% last week and Japan (EWJ) lost 1.3% for the week.

Posted by Carl Delfeld of the Chartwell ETF Advisor

iShares FTSE/Xinhua China 25 Index (FXI)

Today FXI closed at $125.56 after a 2.31% increase. That puts FXI just off its 52 week high of $125.89.
Other noteworthy facts:
* FXI broker through a double top back at $120 when it also passed its bearish resistance level.
* There have been significant corrections to the downside like back in January and February. It would be wise to establish an exit strategy to capture any significant gains.
* Last year around this time FXI remained in demand for seven months and went from $70 to $118. (The past is no guarantee of the future)

Click image for larger view

By DE Smith of MyPortfolioView

China Plunge Has Litttle Effect on Asian Markets

Chinese stocks took another sharp hit today but the global stock markets and the exchange-traded funds that track them have again taken the sell-off in stride. According to Barchart, China's Shanghai & Shenzhen 300 index closed -7.69% but the Nikkei index today closed slightly higher by +0.08% and the Hang Seng closed +0.62%. South Korea rallied +1.44% and Singapore rallied +0.87%.

The Chinese stock market has now fallen by 16% from its May 29 peak, with the Chinese government greasing the skids with its recent hike in the stamp tax on securities trading to +0.3% from +0.1%. The stamp tax hike illustrated that the government was looking for ways to take the air out of the stock market, which also suggested that the government will not provide any support.

It appears so far that the global marketplace is nonplussed by the China market adjustment with wide consensus that it was overvalued. Ironically, it may be thet "H" share markets will be a beneficiary not a casulty of the expected drop in China "A" shares available to Chinese only.

By Carl Delfeld of the Chartwell ETF Advisor

China ETF is not a Bubble?

While the Shanghai A-share index stood at 4,375 on May 23rd representing a 258% gain since the beginning of 2006; the China exchange-traded fund (FXI) made up of primarily H shares listed on the Hong Kong Stock Exchange is up less than 5% so far this year.

The Economist points out several reasons why the Shanghai market may not be a bubble after all. First, it looks at the valuation issue. Chinese shares certainly look expensive, with an average price-earnings ratio of almost 50 (based on historic profits). But p/e ratios are hard to interpret when profits are growing so strongly. Over the past decade China's p/e ratio has averaged 37, much higher than elsewhere. According to Goldman Sachs, firms listed on the A-share market enjoyed an average 82% increase in profits in the year to the first quarter. The article also notes that since 2003, Chnia has been the laggard of the four BRIC countries even with the rapid rise over the last year.

Next, it looks at the likely impact of a sharp pullback in China's market. The total value of tradable shares—that is, excluding those held by the government—is only 25% of GDP (the market capitalisation is nearly 80%). This compares with 150% in America and over 100% in India. Some estimate that only 7% of Chinese hold any shares at all compared to 50% plus in America. But this is changing fast as more than 300,000 new brokerage accounts are opened in China every day!

What is interesting is whether you can now buy H shares in Hong Kong at lower multiples for the same company that trades for on the Shanghai or Shenzhen market. This is certainly something worth looking into.

By Carl Delfeld of the Chartwell ETF Advisor

China, Japan ETFs Rebound After Weak Start

Despite measures by the People’s Bank of China last Friday such as raising interest rates and lifting bank reserve requirements, both intended to suck out liquidity cool hot share prices, the Shanghai Composite finished today up 1% after falling 3% in early morning trading.

The Central Bank also widened the trading band for the renminbi just days before Beijing ministers headed for the US for a meeting at which their management of the allegedly undervalued currency would be a focus of discussion. But the Financial Times reports that the widening of the daily trading limit to 0.5 per cent would have no direct implications for the renminbi’s level against the dollar, since the currency has rarely come close to testing the 0.3 per cent limit set in 2005. The the pace of renminbi appreciation has actually slowed in recent months, to an annual rate of about 2 per cent.

Japanese shares also headed higher on Monday, buoyed by continued yen weakness. The Nikkei 225 gained 0.9 per cent to close at 17,556.87 while the broader Topix was up 0.9 per cent at 1,710.67.

By Carl Delfeld of the Chartwell ETF Advisor

China's Booming Trade Surplus

May 2007 ISI | The State Administration of Foreign Exchange (SAFE) recently released the government's official figures for China's balance of payments in 2006. On the back of a booming trade surplus, the country posted an enormous current-account surplus of US$249.9bn, equivalent to an estimated 9.2% of GDP and up from 7.1% the previous year. The rise in the surplus will provide further ammunition to critics of China's exchange-rate regime, leading to more pressure for more rapid renminbi appreciation. Domestically, the huge size of the surplus is likely to aggravate problems associated with excess liquidity in the economy, given the large inflows of foreign currency requiring conversion into renminbi that such a surplus implies.

An awesome trade machine
Observers were already expecting balance-of-payments data to show an extraordinarily large merchandise trade surplus, given that previously released customs data (which are calculated differently from balance-of-payments numbers) had already shown exports exceeding imports by US$177.5bn in 2006. In the event, as the balance-of-payments figure for imports was significantly lower than the customs figure, the trade surplus in balance-of-payments terms worked out at US$217.7bn. This was up from US$134.2bn in 2005 and accounted for 87% of the total current-account surplus last year. (Read More)

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DE Smith of MyPortfolioView

China/India Oreo ETF

Are you looking for an exchange-traded fund which allows investors to easily invest in 40% of the world's population? The First Trust family of ETFs rolled out the Chindia ETF (FNI) which splits the fifty companies in its ETF basket between China and India.

The weighting of the companies in the ETF is creative and unique. The top three companies for each country based on liquidity are weighted at 7%, the next three at 4%, the next three at 2% and the remaining companies in the basket weighted equally. The ETF will be rebalanced semi-annually and the ETF has an expense ratio of 0.60%,

This weighting scheme is perhaps an improvement over the market cap weighting of say the iShares India ETN where about 35% of the basket goes to three companies; Infosys, Reliance and ICICI Bank. For the China iShare (FXI) the top 5 companies come to about 40% of the basket. Maybe FNI is a better option than a combination of FXI and INP.
By Carl Delfeld of the Chartwell ETF Advisor

China's Stock Market Turnover Dominates

It was an historic day for China's stock markets as the value of shares traded on China’s stock markets on Wednesday was greater than the rest of Asia combined – including Japan – helping the benchmark index to breach the 4,000 mark for the first time. This is just one day after my blog about Japan's shrinking share of world market capitalization.

A report by Jamil Anderlini of the FT mentioned that this was almost certainly the first time that turnover at the Chinese bourses had exceeded that of the rest of Asia. The Shanghai stock exchange recorded Rmb255.3bn ($33.2bn) in turnover on Wednesday, while the smaller Shenzhen exchange saw Rmb121.6bn ($15.8bn) worth of shares change hands, bringing the combined total for the mainland Chinese market to Rmb376.9bn ($49bn) – 21 per cent higher than the previous record set at the end of April.

To put hings into perspective, as recently as March 30, trading volume on the Chinese markets was $16.4bn, while six months ago it was only $5bn a day. The benchmark Shanghai Composite Index up 1.6 per cent to close at 4,013.09, less than two months after it passed the 3,000 mark and some estimate that 300,000 new brokerage accounts are opened every day in China!

By Carl Delfeld of the Chartwell ETF Advisor

Is China Market and ETF a Bubble?

The China market and the exchange-traded funds that track them such as (FXI) have experienced some downdrafts this year - notably on February 27th and April 19th. Nevertheless they have powered on and maintained their forward momentum.

Satoshi Kambayashi of the Economist points out that the Shanghai composite index for yuan and hard-currency shares is now approaching 4,000, a rise of nearly 40% so far this year after a 130% increase in 2006. the combined market value of the Shanghai and Shenzhen exchanges has risen to some 15 trillion yuan ($1.8 trillion), 87% more than at the end of last year and surpassing that of Hong Kong. To put things in perspective, US markets total $15 trillion and Japan $5 trillion.

If the bubble were to pop, it could have a bigger impact on social stability than any previous downturn in the stockmarket's 16-year history. There are now more than 91m accounts held by individuals at brokers or in mutual funds. The Chinese Communist leadership is nervous about what can only be described as "Casino" capitalism.

The iShares China ETF (FXI) is a basket of 25 state-owned mega companies primarily listed on the Hong Kong stock exchange as H shares but incorporated in China. China ETFs are definitely for your risk capital.

By Carl Delfeld of the Chartwell ETF Advisor

China ETF Powers Ahead

The China exchange-traded fund (FXI) may be a bit of a roller coaster ride for global ETF investors but it has paid handsomely to those who hang on. In FXI's ETF basket are 25 large state-owned or controlled firms that are at the forefront of China's economic expansion.

Although there are other ETF options, iShares FTSE/Xinhua China 25 Index (NYSE:FXI), has become the benchmark for foreign investment in Chinese markets, and was the best-performing ETF in 2006, up 84%. From these heights FXI fell 20% in a sell-of late February. Now it is now near to where it ended last year. Jonathan Bernstein of ETFzone writes on this issue and charts the course of FXI. He notes that technically minded traders will not hesitate to point out the "head and shoulders" pattern of this recovery, with the left shoulder beginning in September of last year and the neckline being the February sell-off. This pattern is usually seen as a bearish signal.

Other China ETF options include the PowerShares Golden Dragon Halter USX China (AMEX:PGJ) which primarily holds ADR's (American Depositary Receipts) of Chinese companies listed in the U.S.. The Hong Kong ETF (EWH) is more oriented to financial and real estate firms based in Hong Kong but is still a n excellent proxy for Chinese economic growth.

By Carl Delfeld of the Chartwell ETF Advisor

ETFS in the Region of China Test New Highs

By DE Smith of MyPortfolioView.com

Germany Big ETF Winner

Data tracking capital flows from big money mamnagers into funds and exchange-traded funds from Emerging Portfolio Fund Research (EPFR) show that Germany was the big winner among developed markets during February. A three month, $1.7 billion buying streak by equity funds and ETFs pushed its average weighting among Global Equity Funds above that of France for the first time in more than five years.

Energy sector weightings continued to slide during February, dropping out of the top five sector allocations. As for flow of funds, Global Utilities Sector funds and ETFs such as (JXI) have been the most consistent winners this year. Equity funds and ETFs were net sellers of $2.7 billion of Chinese equities in February but investors and fund managers retained their appetite for smaller, more defensive Asian markets. Malaysia and Singapore both saw record-setting net buying from these funds.

EPFR tracks equity and bond fund flows, cross border capital flows, country and sector allocations, and company holdings data from its universe of 15,000 international, emerging markets and US funds and ETFs with $8 trillion in assets.

By Carl Delfeld of the Chartwell ETF Advisor

China and Japan ETF

Long-term, both the China exchange-traded fund (FXI) and Japan ETFs such as (EWJ) will be affected by how these two giants get along politically and economically. Japan's economic recovery has been in large part due to its growing exports to China and China is still somewhat dependent on Japanese capital and technology.

The Economist looks at the current thawing of relations between the countries but points out that deeply held historical animosities will take a long time to thaw. Conflict over energy sources in the East China Sea could be particulary explosive. But there is movement towards better relations with Japan's Prime Minister Abe pledging not to visit Yasukuni Shrine and China's Premier Wen Jiabao will make the first visit to Tokyo and Kyoto on April 11th-13th in more than six years.

By Carl Delfeld of the Chartwell ETF Advisor

China Moves on Private Property

Investors in the China exchange-traded fund or ETF (FXI) are investing in 25 large state-owned companies but in a larger sense are betting on the overall growth and potential of the Chinese economy. Privatization is critical to this continued growth and the private ownership and transfer of property is a critical iisue.

According to Asia specialist Matthews, after the Communists took over China in 1949, the government collectivized privately-held land on a large scale. In the late 1970’s, China underwent economic reforms whereby the notion of individual property rights resurfaced. One of the most important breakthroughs since then was the privatization of housing in the mid-1990's. At that time, Chinese citizens were granted the right of ownership over their domicile, but not the land underneath it. This right was a boon to the urban population, but was of limited value to rural farmers. In past years, many disputes arose between farmers and property developers over land seizures in which the farmers were given little or no compensation.

Last week, at the Tenth National People’s Congress (NPC), China passed new laws effective October 1st, 2007aimed at bolstering private property rights, particularly focused on land use rights. It should be noted that the new laws do not grant outright freehold ownership of land; nor does anyone know how well these laws will be enforced. However, the new laws do grant longer term control over land and potentially pave the way for the transfer of properties across generations, thereby unlocking a critical component of the private economy.

By Carl Delfeld of the Chartwell ETF Advisor

Treasury Secretary Paulson's Advice to China

Investors in the China exchange-traded fund or ETF (FXI), which is a basket of 25 large state-owned companies, should be interested in U.S. Treasury Secretary Henry Paulson's 40-minute speech at the Shanghai Futures Exchange before local business leaders and government officials. He laid out his case for how financial-market reforms and opening up to foreign competition could help the Chinese government meet its goals for more balanced economic growth and widespread prosperity stated in its latest five-year economic plan.

Elizabeth Price of the WSJ explains that some government officials and participants in China's financial-services sector oppose further foreign competition, accusing offshore investors of pursuing only the most profitable segments of the market at the expense of local rivals and customers. Others, however, want to inject more offshore capital and expertise in their businesses, with the Beijing municipal government, for example, recently partnering with Swiss Bank UBS AG to help create China's first full-service brokerage house run by a foreign firm.

Here is the full text of his speech as posted by the U.S. Consulate in Shanghai.

China ETFs End Week Down 9.87%

After the worst week in Four years here is how the region of China ended the week.
* iShares FTSE/Xinhua China 25 Index (FXI) -10.41%
* iShares MSCI Hong Kong Index (EWH) -8.33%
* iShares MSCI Taiwan Index (EWT) -6.92%
* PowerShares Gldn Dragon Halter USX China (