Despite a series of tightening monetary measures in 2010, China’s economy grew by an astonishing 9.8 percent in the fourth quarter pushing it ahead of Japan as the world’s second largest economy, while fueling concerns that more needs to be done to fight inflation.

According to Aaron Back and Jason Dean at the Wall Street Journal, China’s economy grew at an annual pace of 10.3 percent in 2010, crushing its 9.2 percent growth in the prior year.  Furthermore, China reported a 31 percent increase in exports and a 38 percent increase in imports as the Chinese economy demanded more raw materials, machinery and consumer goods from producers around the world. 

In general, this kind of growth leads to inflation, which has already started to prevail in the emerging market.  According to data released by the Bank of China,  the Consumer Price Index (CPI) in China rose by 4.6 percent over the prior year and the Producer Price Index (PPI) in the nation jumped by 5.9 percent from a last year.  Additionally, inflation is expected to be even more rampant in the coming months as the prices of food and housing in the nation continue to climb. 

China is aware of the threats of inflation and raised interest rates by 0.25 percent twice in 2010, ordered its financial institutions to increase deposit reserves to curb lending and imposed price controls on some staple goods, but it appears that these measures are just not enough as banks figured out ways to shift loans off their books and pump credit into the economy. 

As China continues to take steps to curb inflation, potential consequences could be limiting domestic output by producers leading to a shortage in consumer goods and a decline in exports which could put the brakes on China’s overall economic growth and influence the following ETFs:

  • iShares FTSE/Xinhua China 25 Index Fund (FXI), which allocates nearly 47.8% of its assets to the Chinese financial sector
  • Global X China Financials ETF (CHIX), which is a sector specific play on the Chinese financial sector
  • Global X China Consumer ETF (CHIQ), which is a sector specific play on the Chinese consumer who will be the first to feel the impacts of rising prices
  • SPDR S&P China ETF (GXC), which allocates 32.36% of its assets to financials and 7.44% to consumer discretionary
  • Guggenheim China All-Cap ETF (YAO), which allocates 33.7% of its assets to financials and nearly 5.5% to consumer discretionary.

Disclosure : No Positions

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