Traders See Red in China (FXI)
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iShares FTSE China 25 Index ETF (NYSE: FXI) is lower by nearly 8.5 percent so far this year. In the last 24 months, the ETF has declined by 16 percent. By comparison, SPDR S&P 500 (NYSE: SPY) is higher by 34 percent in the past 24 months. Considering all the hype in recent years about China stocks and its emergence as an economic powerhouse, the fact remains that China's proposed soft landing has fallen upon a large rock – and not just any rock, a rock with sharp edges that is crawling with scorpions.
China's problem is that the entire economy is highly cyclical and too dependent on manufacturing. Like other cyclical economies it is bound to experience extreme highs and extreme lows, like the economy in Detroit for example. Granted China's manufacturing facilities are a lot shiner than the old plants in Michigan, but that doesn't provide much insulation when times get tough.
If China had any insulation at all, it was domestic growth. Unfortunately for the Chinese, so far efforts to stimulate the domestic economy in China have proven to be ineffective, at least in terms of ramping up manufacturing. Last Friday, Flash PMI data in China read 47.8, which indicates a contraction in manufacturing to its lowest level in 9 months. This Saturday, China's official manufacturing PMI for August is expected to breach 50, the level separating growth from contraction, and this could open the door for more downside for China stocks.
In terms of trading, FXI has near term support at 32, but a break of this level will put 2011 Oct. lows at 30 in the crosshairs, say traders. A break below this level could open the floodgates and, like China's flag, investors might see red.
China's problem is that the entire economy is highly cyclical and too dependent on manufacturing. Like other cyclical economies it is bound to experience extreme highs and extreme lows, like the economy in Detroit for example. Granted China's manufacturing facilities are a lot shiner than the old plants in Michigan, but that doesn't provide much insulation when times get tough.
If China had any insulation at all, it was domestic growth. Unfortunately for the Chinese, so far efforts to stimulate the domestic economy in China have proven to be ineffective, at least in terms of ramping up manufacturing. Last Friday, Flash PMI data in China read 47.8, which indicates a contraction in manufacturing to its lowest level in 9 months. This Saturday, China's official manufacturing PMI for August is expected to breach 50, the level separating growth from contraction, and this could open the door for more downside for China stocks.
In terms of trading, FXI has near term support at 32, but a break of this level will put 2011 Oct. lows at 30 in the crosshairs, say traders. A break below this level could open the floodgates and, like China's flag, investors might see red.
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