6 Reasons Why a Soft Landing in China Matters (MCHI, FXI, ECNS)
Russ Koesterich: World markets and financial media seem to react to every new data point about China’s economy, whether it’s manufacturing reports or gross domestic product numbers. This market sensitivity isn’t very surprising given how important China has become for the global economy. But it also means that it will be hard for the global recovery to continue without a soft landing in China.
A new paper, “Braking China. . . Without Breaking the World,” from the BlackRock Investment Institute offers a nice list of six reasons why this is the case. Here are the reasons in no particular order.
- China has quickly become the second-largest economy in the world.
- China will likely contribute two-fifths to global growth this year, twice as much as the United States. See the chart below:
- Resource-hungry China has an outsized influence on most commodities markets.
- China is the largest foreign holder of US Treasuries.
- GDP per capita in China jumped more than 20-fold to $4,400 in the 30-year period ended in 2010.
- China is now the largest market in the world for cars, computers, mobile phones and countless other products. Wine sales in China, for instance, have more than tripled in just five years.
The good news for the global recovery is that I believe China will most likely achieve a soft landing in the near term. Even if China grows in 2012 at 7.5%, the Chinese government’s new lowered growth target, it would still be one of the world’s fastest growing economies. Plus, as the government’s growth goal is typically a floor, actual Chinese growth is expected to be in the 8% to 8.5% range this year. And as inflation in China continues to slow, looser monetary policy from the country’s central bank should further support the local economy.
As such, I continue to hold an overweight view of Chinese equities, which I prefer to access through the iShares MSCI China Index Fund (NYSEARCA:MCHI), the iShares FTSE China 25 Index Fund (NYSEARCA:FXI) and the iShares MSCI China Small Cap Index Fund (NYSEARCA:ECNS).
The author is long FXI
Source: BlackRock Investment Institute, Bloomberg
International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume. Securities focusing on a single country may be subject to higher volatility.
Russ Koesterich, CFA, is the iShares Global Chief Investment Strategist as well as the Global Head of Investment Strategy for BlackRock Scientific Active Equities. Russ initially joined the firm (originally Barclays Global Investors) in 2005 as a Senior Portfolio Manager in the US Market Neutral Group. Prior to joining BGI, Russ managed several research groups focused on quantitative and top down strategy. Russ began his career at Instinet in New York, where he occupied several positions in research, including Director of Investment Strategy for both US and European research. In addition, Russ served as Chief North American Strategist for State Street Bank in Boston.
Russ holds a JD from Boston College Law School, an MBA from Columbia Business School, and is a holder of the CFA designation. He is also a frequent contributor to the Wall Street Journal, New York Times, Associated Press, as well as CNBC and Bloomberg Television. In 2008, Russ published “The ETF Strategist”(Portfolio Books) focusing on using exchange traded funds to manage risk and return within a portfolio.