How to Profit From IMF's China Warning

The International Monetary Fund (IMF) warned on Monday that Chinese economic growth could be cut in half if the financial crisis facing the European Union causes European and American economies to fall into recession. Although the IMF forecast 8.2% growth for China this year, it said that the growth rate could fall to 4.2% if the European Union and and the United States fall into recession. The Chinese government has made efforts to increase domestic demand but its export driven economy is still heavily dependent on trade with the European Union and the United States. If a Greek default were to worsen the eurozone's financial crisis, it could push Europe and the United States into a recession that would lead to a major decrease in demand for imports from countries like China. The International Monetary Fund said that if the economic crisis worsens, China should introduce an economic stimulus package of about 3% of its gross domestic product in order to increase domestic demand in China and prevent the country's economy from slowing down too quickly. Although China has resisted outside calls to increase its purchases of eurozone bonds, it's more likely that China will move to support the country's all important growth rate if the eurozone's financial troubles threaten the Chinese economy. The IMF sounded a positive note when it said that the Chinese government's habit of being fiscally disciplined left the country room to maneuver in the event of a serious external economic shock. For his part, Chinese Premier Wen Jiabao said last week that the Chinese government would “fine-tune” its economic policy in order to maintain a growing Chinese economy if demand from trading partners falls due to a worsening European financial crisis. Until recently, China has been focused on fighting inflation because the government feared that rising prices could lead to growing public unrest. However, as the European financial crisis deepens, the Chinese government has had to make plans for a future that could see falling demand from its most important trading partners. Falling growth rates could hurt Chinese consumers even harder than the inflation that they have endured over the last couple of years, so the Chinese government is likely to follow much of the advice of the International Monetary Fund if economic conditions worsen. ACTION ITEMS:

Bullish:
Traders who believe that China will successfully weather the storm of any downturn in the economies of Europe and the United States might want to consider the following trades:

• The iShares FTSE China 25 Index Fund FXI and the Global X China Consumer ETF CHIQ are both well positioned to profit if China steps in to prop up its growth rate by boosting domestic demand. A buying opportunity could open up if the worsening financial crisis in Europe sends Chinese stocks falling lower.

Bearish:
Traders who believe that China still relies too heavily on trade with the United States and Europe may consider an alternate position:

• If America and the European Union are headed for recession, ETFs like the ProShares Ultrashort FTSE China 25 FXP and the Direxion Daily China Bear 3x Shares CZI could climb higher. China's economy is still heavily dependent on exports, so it might be unable to increase domestic demand quickly enough to make up for a fall in exports to Europe and America.

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