Up until a few days ago, it was not a stretch to say plenty of U.S. investors did not know what SHIBOR is. After Thursday’s market meltdown, folks still may not what SHIBOR stands for (Shanghai Interbank Offered Rate), but they do know it is China’s equivalent of the London Interbank Offered Rate (LIBOR). They also know a spike in SHIBOR rates has exposed flaws in the Chinese banking system.
While Beijing is looking to bolster China’s reputation for decent dividends, government efforts to push the largest companies to payout 30% of profits in dividends have been met with tepid responses this year. In turn, Chinese investors continue to embrace real estate, although fears of a property bubble remain elevated, opaque wealth management products. Those instruments are seen as the primary culprits behind the liquidity crunch faced by Chinese banks on Thursday. [Weak Credit Jitters Hit China ETFs]
The bad news is SHIBOR, should it become an ongoing problem for Chinese banks, will likely impact ETFs beyond the usual suspects of the China lineup such as the iShares FTSE China 25 Index Fund (NYSEArca: FXI) and the iShares MSCI Hong Kong Index Fund (NYSEArca: EWH). [Hong ETF in Focus as Data Disappoints]
Deeper SHIBOR problems will likely hammer the following ETFs as well.
iShares FTSE China (HK Listed) Index Fund (NYSEArca: FCHI)
Two of the most common complaints about FXI is its heavy exposure to the financial services sector (54.6%) and its small number of holdings that some investors view as not accurately reflective of the diverse Chinese economy (just 26 holdings).
The iShares FTSE China (HK Listed) Index Fund is a credible alternative to FXI with 158 holdings, but this ETF is still vulnerable to SHIBOR shenanigans. Five of FCHI’s top-10 holdings are financial services names and three of China’s four largest banks are found among that group. Overall, FCHI devotes almost 41% of its weight to financials. FCHI is small, just $29.4 million in assets, but the 13% loss in the past month is not.