Although China recently took the step of raising its banks’ reserve requirements, some believe all may not be well with their financial institutions. If they’re correct, a few exchange traded funds (ETFs) could get dragged down with them.
China’s greatest challenge, says Barron’s, is a pile of non-performing loan portfolios. They’re holdovers from 2008-2009 – the height of the financial crisis. That’s when banks had to flood the economy with capital. [Chinese Rate Increase Sinks Commodity ETFs.]
The article also pointed out the potentially negative effect of today’s rate hike, which could soon spell higher debt-service costs that could eat into profits. [Chinese ETFs: Foreign Investors Look At Long Term Prospects.]
China so far has been responsible in dealing with its banks issues, particularly when it comes to raising the reserve requirements. They’ve watched us and other economies, and it looks as though they’ve learned a few lessons.
To cope with the problem, one fund manager suggests that China will raise reserve requirements further next year. If they don’t, The ETF Professor at Benzinga has a few ETFs for you to avoid:
- Global X China Financials (NYSEArca: CHIX): Focuses only on Chinese banks.
- iShares FTSE/Xinhua China 25 (NYSEArca: FXI): Allocates more than 47% of its weight to financials
- SPDR S&P China (NYSEArca: GXC): Allocation of 34% to financials
If Chinese banks do go insolvent, then check out ProShares UltraShort FTSE/Xinhua China 25 (NYSEArca: FXP), which is designed to be an inverse play on FXI./
Tisha Guerrero contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.