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Enter the dragon

According to the Economist, China’s share of the world’s market increased during the recession and it will continue to do so. It has overtaken Germany to become the World’s largest exporter. In “Fear the Dragon”, written January 7, 2010 in the Economist print edition, several things support a long-term bullish outlook for China.

Let’s explore the investment opportunity with FXI-N, iShares Xinhua China 25 ETF, an iShare listed on the New York stock exchange. The iShares FTSE/Xinhua China 25 Index Fund seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the FTSE/Xinhua China 25 Index. The top sectors in this fund are 45.84% Financials, 16.67% Telecommunications, 13.44% Basic Materials, 12.04% Oil & Gas and 8.93% Industrials.

The FXI has gone from a low of $22 in March 2009 to closing at $44 on Friday Jan 8, 2010. The current price crossed the 50-day and the 100-day moving average in April of 2009 and has had strong support all along, until recently. In December, the current price crossed below the 100-day moving average and then was followed by the 50-day moving average. With the most recent rally MACD (moving average convergence divergence) has turned positive and it looks like the current price is about to cross the 50-day moving average with pretty good relative strength. Technically, it is looking bullish again by these measures.

Let’s step back to some of the fundamental support for the future by exploring some of the arguments for and against the case of China. Both exports and imports are increasing in China. According to the Economist article, China is taking an even bigger slice of America’s and the World market. In the first ten months of 2009 America imported 15% less from China than in the same period of 2008, but its imports from the rest of the world fell by 33%, lifting China’s market share to a record 19%. So although America’s trade deficit with China narrowed, China now accounts for almost half of America’s total deficit, up from less than one-third in 2008. Over the ten years to 2008 China’s exports grew by an annual average of 23% in dollar terms, more than twice as fast as world trade. If it continued to expand at this pace, China might grab around one-quarter of world exports within ten years. That would beat America’s 18% share of world exports in the early 1950s, a figure that has since dropped to 8%. China’s exports are likely to grow more slowly over the next decade, as demand in rich economies remains subdued, but its market share will probably continue to creep up. Projections in the IMF’s World Economic Outlook imply that China’s exports will account for 12% of world trade by 2014. In addition, The Economist reported imports have been stronger than its exports, rebounding by 27% in the year to November, when its exports were still falling. America’s exports to China (its third-largest export market) rose by 13% in the year to October, at the same time as its exports to Canada and Mexico (the two countries above China) fell by 14%.

The challenges to China are that Foreigners insist that the main reason for China’s growing market share is that the government in Beijing has kept its currency weak. Foreign hostility to China’s export dominance is growing. Paul Krugman, the winner of the 2008 Nobel economics prize, wrote recently in the New York Times that by holding down its currency to support exports, China “drains much-needed demand away from a depressed world economy”. He argued that countries that are victims of Chinese mercantilism may be right to take protectionist action. The other issues include the challenges of doing business in China due to language barriers, laws and growing pains.

All said, I would want the dragon on my side in the long run.


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About the Author

Jeff Stathopulos, CIM, CFP, Portfolio Manager

Jeff is an advisor and partner with The Navigation Team at Scotia Wealth Management.

He lives in Kelowna with his wife Tanya, their two university bound daughters and their canine kids.

You can contact Jeff by email at [email protected]

Website:  www.yourlifeyourplan.ca

The Navigation Team

Scotia Wealth Management

This column is for information purposes only. It is recommended that individuals consult with their financial advisor before acting on any information contained in this article. The opinions stated are those of the author and not necessarily those of Scotia Capital Inc. or The Bank of Nova Scotia. ScotiaMcLeod is a division of Scotia Capital Inc., Member Canadian Investor Protection Fund.



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The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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