Investing in China Without Investing in China

Investors are shying away from investing in China after ominous financial reports have come out in recent week regarding the strength of its economy.  

The VanEck Steel ETF (SLX) owns shares in companies involved in the steel industry, and could be a proxy for investing in the country while not actually holding Chinese companies. SLX has virtually no exposure to Chinese steel-making companies but has implied exposure to China, given its dominant role in the global steel market. 

Steel is an industrial commodity that is an alloy of iron and carbon, with more strength than other forms of iron. Stainless steels are resistant to corrosion and oxidation, containing chromium and nickel. Construction projects, water pipes, furniture, appliances, automobiles and other transport vehicles are some of the many steel applications.  

While SLX holds no China equities, it has significant exposure to the Chinese economy, making it a proxy for the future financial condition of the world’s second-leading economy. 

China is the world’s leading steel-producing country: 

Source: worldpopulationreview.com 

The above chart highlights that in 2021, China produced nearly nine times as much steel as India, the second-leading producing country. China is also the world’s leading steel-consuming country. Therefore, the path of least resistance of steel prices is a function of China’s economic growth or contraction.  

Investing in China Via SLX 

At $64.95 per share on Aug. 11, the SLX had $120.350 million in assets under management. The fund trades an average of 18,646 shares daily and charges a 0.56% expense ratio.  

SLX’s holdings include a diverse group of steel-related companies. The top two holdings are Rio Tinto and Vale SA, two leading iron ore producers, with over 10% of the fund’s assets invested in each. The current dividend yield is 4.33%, and SLX’s price-to-earnings ratio of 6.12, far below the level of the leading U.S. stock market indexes.  

SLX Geographic Breakdown: No Chinese Exposure 

SLX has diversified international holdings: 

Source: etf.com 

While just over half of the ETF’s assets are in U.S. steel companies, SLX has no exposure to China’s steel companies, even though the country is the world’s leading producer and consumer.  

SLX Has Rallied Since Late May 

The ETF reached a $55.19 low on May 31, 2023, a short-term bottom.  

Source: etf.com 

The above chart highlights SLX’s nearly 30% rise to $71.42 on July 25. At $64.95 on Aug. 11, the fund was closer to the late July high than the May bottom. The trend turned higher in late May, and the bullish path of least resistance remains higher on Aug. 11 despite the recent pullback.  

SLX Since Late May and in 2023 

The etf.com Fund Flows Tool shows a slight positive flow into the ETF since the May 31 low:  

Source: etf.com

The above chart shows $2.41 million flowed into SLX since the end of May 2023. In 2023, $10.39 million flowed into the steel product.  

SLX Is a Proxy for a Chinese Economic Recovery  

Steel prices in China have declined from the March 2023 highs but have stabilized since late May. 

Source: London Metals Exchange 

The above chart highlights the stability and slight upward bias in LME steel HRC FOB China since May 25. Higher Chinese steel prices will support earnings in steel-making companies and SLX.  

Markets reflect the economic and geopolitical landscapes, which remain highly volatile in August 2023. Many investors have shunned China’s stocks because of the tensions between Washington and Beijing.  

As the world’s leading producer and consumer of steel, the path of least resistance of the industrial metal is a function of China’s economic growth or contraction. The recent rally in SLX could signal that a recovery in the country is on the horizon despite weak economic Chinese data. 

The bullish trend since late May has run out of some upside steam, and the latest China economic data could push SLX lower over the coming weeks. Picking bottoms in any market is dangerous, and the ETF could fall as quickly as it rose.  

However, buying SLX on a scale-down basis with its over 4% dividend can build a risk position for China’s growth without direct Chinese exposure. The dividend will pay investors while waiting for capital appreciation.