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.
iShares MSCI Emerging Markets Financials Sector Index Fund (NasdaqGS: EMFN)
Although the iShares MSCI Emerging Markets Financials Sector Index Fund is another small ETF with just $5.78 million in assets, in the right market environment this ETF would be worth a look. The right market environment being one where risk appetite is high and bank stocks along with emerging markets ETFs are in style.
Although China is EMFN’s top country weight at 29.3%, it is far from the fund’s only problem. Russian banks are proving reluctant to go along with that country’s dividend raising efforts. Protest-riddled Indonesia and Turkey combine for another 10% of the ETF’s weight and the almost 10% weight to Brazil is far from attractive at the moment. [Emerging Markets ETFs Fall as Easy Money Dries Up]
Global X China Financials ETF (NYSEArca: CHIX)
China’s four largest banks combine for 34% of the Global X China Financials ETF’s weight. The SHIBOR news took the fund down 6.1% Thursday, making it one of the worst performers in the China ETF group. The fund now resides 13.2% below its 200-day moving average, not a bullish sign at all.
Global X China Financials ETF
ETF Trends editorial team contributed to this post.