China- and Hong Kong-focused real estate ETF Claymore/AlphaShares China Real Estate (NYSE: TAO), a top recommendation in the GETFP Growth Portfolio, is down around 10.5 percent since our original recommendation. The global market correction has intensified fears of a housing bubble in China, hurting the ETF’s performance.

As for the recent pullback in global equities, Claymore/AlphaShares China Real Estate held its own relative to the broad market; its decline exceeds that of the S&P500 by just 1 percent. In light of the ETF’s risk characteristics this is a positive.

On the China issue, investors’ worries are twofold. First, there’s widespread concern that the Chinese housing market is ready to collapse under intense speculation. Second, investors fear the Chinese government will overreact and slam the brakes too hard, as it did in 2008.

We beg to differ. The Chinese government has traditionally been supportive of homeownership. In the late 1990s it essentially transferred government-owned apartments to their occupants. After this move the homeownership rate in China’s urban areas skyrocketed to 70 percent overnight.

Because the homeownership rate has risen, an even greater part of the population–mainly in the urban areas–is enjoying the benefits of rising real estate prices. This substantial subset would also appreciate the government doing everything it can to prevent a violent decline. Although the government has stepped in to cool the housing market, it will do everything in its power to sustain the real estate cycle.

This doesn’t mean mistakes won’t be made; what we expect is that those from two years ago won’t be repeated. And there’s no sign yet that Chinese authorities have selected a path of total ruin for the housing market this time around.

On the bubble issue things are much simpler to evaluate. Demand remains strong because a significant part of the population in the big cities is in the process of upgrading from the old apartments they received more than 10 years ago, while people in smaller cities are eager to obtain their first homes. And China’s leaders have expanded plans call for urbanized growth in the so-called second- and third-tier cities; the housing sector should remain in growth mode for some time.

Chinese real estate finance isn’t fancy. In other words, home equity loans, option ARMs, extensive securitization and the like don’t exist. Twenty five percent of all housing transactions are in cash. The rest of the market operates through simple mortgages, where the minimum down payment is 20 percent. Many new homebuyers put down 30 or even 40 percent.

Accordingly, China’s banks have manageable, if not necessarily small, exposure to the property sector. In 2009 loans to real estate developers accounted for 6.3 percent of total outstanding loans, while mortgages accounted for 12 percent. The banking system’s total exposure to real estate loans is slightly north of 18 percent–not a large number by Chinese or international standards.

Absent a massive blunder, the Chinese real estate market will cool down but much less than the market currently discounts–and it certainly won’t collapse–because of policy decisions.

That being said, if the global financial markets don’t stabilize, the Chinese and Hong Kong real estate markets will suffer. For now, we view the correction as a buying opportunity, though you should deploy funds in increments. Claymore/AlphaShares China Real Estate remains a buy up to 20.

Portfolio Allocations

The GETFP Portfolio recommendations are listed in order of preference, beginning with our current favorite ETF. In the Growth Portfolio, for instance, our new favorite is iShares Dow Jones US Oil Equipment (NYSE: IEZ), which is discussed in this issue’s Feature.

This new introduction drops Claymore/AlphaShares China Real Estate to second place. Note that the Portfolio is constructed in a way that if you allocate funds among several picks, starting with the first one and going down the list, the risk and volatility should generally balance.

The recommendations in the Income & Hedges Portfolio are also arranged in preferential order, our top pick being iShares JP Morgan USD Emerging Market Bond (NYSE: EMB).