ETFs: Bull in a China shop

China has produced some spectacular long-term returns, but higher interest rates are beginning to put a dampener on the party. Nick Sudbury reports

The speed of China’s recovery from the global downturn has far outpaced that of the West, with the economy expected to grow more than 9% in 2011. There are signs this may not be sustainable and even Premier Wen Jiabao has acknowledged that the country faces an uphill battle if it is to meet its growth targets over the next five years.

China’s main problem is that its recovery has largely been fuelled by a dramatic increase in bank lending, which has raised fears of a property bubble and rampant inflation. The National Bureau of Statistics revealed CPI hit 5.4% in March, which is well above the official 4% target.

In order to keep a lid on the situation, China’s central bank has now raised interest rates four times since October. It has also introduced various other measures in an attempt to bring the property market back under control.

Long-term gains
There are 14 ETFs with a five-year track record of investing in China, which together have produced an average return of 102.11%. The top performer was the iShares FTSE A50 China index with a gain of 181.54%, although most of this came early in the period as it has been in negative territory over the last three years.

This Hong Kong-listed ETF invests in derivatives to synthetically replicate the returns from an index of the top 50 A-share stocks on the Shanghai and Shenzhen exchanges. These represent some of the largest and most liquid Chinese companies.

Elsewhere the performance has been less spectacular, but more consistent. Examples include the Hong Kong-listed iShares MSCI China index and the iShares FTSE China 25 index, which is available on the London Stock Exchange and various European exchanges.

The former is benchmarked against the large and mid-cap Morgan Stanley Capital International universe and provides exposure to the top 85% of Chinese equities by market value. There is also a new US-listed version of this ETF that has just become available.