Softer Landing Seen for Chinese Consumers

NEW YORK TheStreet -- The other day the Financial Times gave a rundown of statistics of all the things going right in China, like industrial output up 10% year on year, inflation low at 2% and retail sales were up 14.9%.

The one disappointing number highlighted was exports, which grew at 2.9% versus 11.6% for the same period last year. Perhaps because of the data the Shanghai Composite Index has rallied 6% in the last week after what has previously been a lousy year.

If the recent economic data is the start of better times for Chinese equities, investors wanting to take a clue from the data to establish a position in Chinese equities would probably want to avoid export-related companies. But the retail sales numbers might be making an argument to go back into China via the consumer sector and the Global X Consumer ETF ( CHIQ).

At the industry level the fund is heaviest in retail stores at 22% and food companies at 19%. Also featured prominently is the automobile industry with almost 13%. Things like retail and food are very typical for a consumer fund and should offer exposure to companies where there is always demand for the end products regardless of economic conditions.

This could be important if the Chinese so-called hard landing ever materializes. The exposure to automobiles could serve to make the fund a little more sensitive to the economic cycle should demand for new cars suffer a serious decline.

CHIQ has 40 holdings and has an expense ratio of 0.65%. Unlike many consumer sector funds CHIQ has historically not paid much in the way of dividends. In its history the fund paid a 19-cent dividend two years ago and only 6 cents last year amounting to a yield well below 1%. The fund will declare its 2012 dividend toward the end of the year.

There are also funds for other sectors in China but concerns of a hard landing still persist and those other sectors, Global X China Financial ETF ( CHIF), Global X China Industrial ETF ( CHII)and Global X China Materials ETF ( CHIM) would be more vulnerable to slower growth because demand for products and services from those sectors are usually more aligned with the economy.

Consumer stocks, however, benefit from elasticity of demand as in the U.S. and mentioned above but consumer stocks in China also benefit from an emerging middle class in China and a migration of Chinese citizens from rural areas to more urban settings for work that leads to that middle class lifestyle.

If the hard landing materializes as feared it would not be a recession as typically thought of in the U.S. Hard landing concerns center around GDP dropping to mid-single digits. That would be a large drop from current levels and would reasonably hinder industrial output but consumer demand for goods and services would be relatively unaffected making CHIQ a relatively safe way into China.

At the time of publication the author had no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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