ECNS iShares MSCI China Small Cap

China reported its latest GDP growth rate late last night, coming in well below the first quarter level. The country grew at an annualized rate of ‘only’ 7.6% compared to an 8.1% reading in the previous quarter. This also continues the sluggish trend for the massive emerging market as this annualized growth rate was at 9.8% to start 2011, suggesting a modest slowdown in China’s pace of growth over the past few years.

Beyond this disappointing report, however, investors also saw Chinese industrial production, year-over-year, slide to 9.5% as well. This figure implies that the country is producing less and is starting to be impacted by the weakness in developed markets too (read The Guide to China Bond ETFs).

In addition to developed market concerns, the country is also facing a huge property bubble, worries over urbanization/employment levels, and crippling debt in many of China’s municipalities. In fact, more than $1.7 trillion has been lent to local Chinese governments, potentially creating a huge problem should this debt burden become unmanageable or if tax revenues slump heavily.

Despite the doom and gloom though, some are speculating that this could be the low point of China’s growth this year as stimulus measures begin to kick in and boost economic growth. Some predictions currently have the full year growth rate coming in at 8.2%, suggesting that the rate could tick back up heading into the second half of the year, especially if developed markets can rebound.

I have long been a big proponent of emerging market investing but I now I am not so sure about their prospects, at least in the short-term. Nevertheless, China stocks were rallying Friday after the report while many popular China ETFs added about 1.5% on the day, so at least some investors are buying despite the uncertainty.

Still, from a year-to-date look, China large cap ETFs (such as FXI and PGJ) are down more than 6%, while some of the more small cap focused funds (like HAO, ECNS, or PEK) are flat or even posting a YTD gain. Given this, there isn’t much that can be derived from the momentum of the overall market, although all funds focused on the region have certainly been under pressure over the past few weeks (also read Forget FXI: Try These Three China ETFs Instead).

Clearly, if this is the start of severe rough patch for China investors should bail on the country. However, given the stimulus measures and some solid fundamentals in corners of the country’s massive market, it could be an interesting time to take a closer look at investing in the nation…

What do you think; is this the start of China’s much-hyped ‘hard landing’ or is it just a disappointing blip in the country’s growth trajectory?

Let us know in the comments below!

 
ISHARS-MS CH SC (ECNS): ETF Research Reports
 
ISHARS-FT CH25 (FXI): ETF Research Reports
 
GUGG-CHINA SC (HAO): ETF Research Reports
 
MKT VEC-CHINA (PEK): ETF Research Reports
 
PWRSH-GL DR HA (PGJ): ETF Research Reports
 
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