How to Trade on Chinese Interest Rate Hikes (FXI, YXI, CHIM)

The Chinese stock market ended Thursday trading down, amid concerns about the government's plans for further tightening monetary policy in an attempt to bring inflation under control. While most stock markets in Asia ended Thursday trading higher, the SSE Composite Index of Chinese traded stocks fell 25.88 points, or 0.88%, to 2,929.89. Prices for food and housing have been on the rise in China for some time now and the government is under growing pressure to do something about it. Chinese officials have looked on warily as unrest in North Africa and the Middle East first led to protests, then violent riots and eventually to the downfall of the leaders of Egypt and Tunisia and civil war in Libya. The Chinese leadership is concerned that higher prices that have not been matched by rising incomes could lead to similar upheaval in China. To prevent such an occurrence in China, local and federal governments have implemented a wide range of measures. In the housing market, these plans include the building or renovation of 10 million housing units, raising minimum down payment requirements and introducing property taxes that will cut into the profit of property sellers, with the intended goal of reducing speculative investment in real estate. The Chinese government has also raised interest rates and increased bank reserve requirements several times since last year. If the government raises rates again, the stock market is sure take a hit. There are several investment options available to investors depending on how they see the economic situation in China unfolding. If the government decides to leave interest rates as they are, the iShares FTSE China 25 Index Fund FXI should see its share price rise. However, if interest rates are raised again, the ProShares Short FTSE China 25 YXI is an ETF that would benefit from that news. Although the government is trying to cool the economy, it is also increasing the supply of housing. The Global X China Materials ETF CHIM is an ETF that could climb higher because of the introduction of millions of new homes to the housing market and the rise in demand for appliances to fill all those homes.