Investing

China ETF Plunges 4% in a Day

460675605Issues of margin trading, a surge of individual investors into local shares, a ballooning stock market and a slowing of the world’s second largest economy sent the largest China exchange traded fund (ETF) by assets plunging over 4% in a day. The iShares China Large Cap ETF (NYSE: FXI) drop may only be a start.

ETF Database measures the iShares China Large Cap ETF as first among China ETFs by assets at $7.4 billion. That is well ahead of the number two iShares MSCI China ETF (NYSE: MCHI), which has assets of $2.4 billion. Even with the recent sell off, each is up over 20% year to date. The surges are good news for investors who hold them. However, the increases are rapid enough that they carry substantial risk against ever a modest amount of more bad news from the Chinese markets.

The Hang Seng Composite is up over 16% in the past month. The Shanghai Stock Exchange Composite is up nearly 19%. Part of the alarm about the value of the rise in China shares is that large caps are not among the leaders of the rallies, although the index for local large caps has done well. The leaves companies with much smaller revenue as the primary catalysts — not what most investors would think is an ideal set of circumstance.

The value of China Mobile Ltd. (NYSE: CHL), the world’s largest wireless company, has only risen 3% in the past month. The shares of China Petroleum & Chemical Corp. (NYSE: SNP) have moved up 12% in the same period. If a country’s largest public corporations are the best foundation for a market rally, China’s markets have at least one important weakness.

The primary reason for most market collapses is the state of the local economy. China experts continue to revise GDP forecasts down, and some forecasts for 2015 are as low as 6.5%, well off the pace of the past decade.

There are more reasons for the Chinese markets to go down than go up, and that means the same for its stock markets.

ALSO READ: China Growth Slows, Drags Down Asia

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