China Leads Fund Inflows But Fundamentals in Question

By Carl Delfeld of ChartwellETF.com

Following a trend that began in late March, with cash coming off the sidelines and in favor of emerging markets equity ETFs and funds, High Yield Bond and some sector funds carried into the first week of May. EPFR Global-tracked Asia ex-Japan, Latin America, EMEA and the diversified Global Emerging Markets Equity Funds posted combined inflows of $3.6 billion and Emerging Markets Bond ETFs&funds recorded their best week since early in the first quarter of 2008.

China remains a major driver of both sentiment and fund flows for the emerging markets asset class as its economy responds to aggressive lending by domestic banks. Through May 6 China Equity Funds had taken in fresh money eight of the past nine weeks and 29 of the past 30 trading days, including a year-to-date daily high of $294 million on May 4.

But some recent data is in conflict with the “China will buck the downturn” thinking that the sharp increase in bank lending will allow China to maintain a 6-7% GDP growth rate is emerging.

Electricity production, often regarded as a proxy for economic growth in China, fell 3.5% from a year earlier in April.

China’s industrial production growth from a year earlier slowed to 7.3% in April from 8.3% growth in March. This also half the percentage growth that was posted one year ago as reported by ChartwellETF.com.

China's exports slumped for the sixth straight month amid warnings that weak overseas demand was more than offsetting government spending to boost factory investment.

The 22.6% drop in exports in April from a year earlier, to $91.9 billion, was bigger than March's 17% fall and larger than projected.

For investors going forward, the question is, pass on China, go long with (FXI) or short with (FXP)?