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Mixed Economic Results from China Add to Sluggishness in Oil

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Volatility in China due to leverage and inexperienced investors

ETFs tracking Chinese equities have experienced money inflows of $1.1 billion over the past month. The Shanghai Composite Index climbed to a seven-year high. But along with this rally came a high level of market volatility, three times more than US equities.

According to a Bloomberg report by Belinda Cao dated June 1, 2015, the volatility in Chinese markets is fueled by a combination of leverage and the presence of inexperienced investors. The 100-day volatility of the Shanghai Composite Index was at 32% earlier this month, its highest level since early 2010. That’s almost triple the volatility of the S&P 500 Index, which hovered around 12%.

The Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (ASHR) experienced capital inflows of $160 million during May 2015. The iShares MSCI China ETF (MCHI) had inflows of $111 million during the same period.

As you can see in the above table, Chinese energy ETFs and ADRs (American depositary receipts) have outperformed US energy ETFs. While the Global X China Energy ETF (CHIE) experienced year-to-date returns of 8.66%, the Energy Select Sector SPDR ETF (XLE) posted year-to-date returns of -1.80%.

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Chinese ADRs such as China National Offshore Oil Corporation (CEO), China Petroleum & Chemical Corp. (SNP), and PetroChina (PTR) have posted healthy year-to-date returns, as shown in the above table. On the other hand, US energy firms such as Occidental Petroleum (OXY) and Devon Energy (DVN) posted year-to-date returns of -20% and -16%, respectively.

Mixed results from the Purchasing Managers Index

China is one of the largest consumers of oil in the world. China’s economic growth is vital for a boost in the global demand for oil. The Purchasing Managers Index (or PMI) for manufacturing grew to 50.2 in May from 50.1 in April due to support measures from the government. But according to a private survey of small- and medium-sized enterprises in China conducted by HSBC (HSBC) and Markit, the PMI came to 49.2 in May, below the critical value of 50.

In the next part of this series, we’ll see whether the performance of oil companies correlates with hedging activity.

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