Ebbing SHIBOR Fears Could Boost China ETFs

The iShares China Large-Cap ETF (NYSEArca: FXI), the largest China ETF by assets with almost $5.8 billion, has surged 10.4% in just the past five trading sessions. In fact, FXI is in the midst of a seven-day winning streak. A big part of the reason FXI’s recent success and that of rival China ETFs is a more sanguine outlook on Chinese banks.

Such a scenario seemed impossible to imagine in June when a spike in SHIBOR rates prompted questions about liquidity within the Chinese banking system, a scenario that weighed on FXI and several other large China funds. The SHIBOR debacle put the spotlight on FXI and some other large-cap China ETFs due to substantial allocations to the financial services. As of Monday, FXI’s weight to the sector was nearly 53%. [ETFs Languish as Analysts Miss Mark on Chinese Banks]

While the SHIBOR mess is still fresh in investors’ minds, the end of the third quarter and two Chinese holidays around the corner, some market observers may be worried about a September SHIBOR sequel. Bank of America Merrill Lynch does not see things that way.

“We are sure that China’s new leadership cannot afford to be hit by another unnecessary interbank liquidity squeeze amid the turmoil of some emerging markets and in the run-up to the very important 3rd Plenary Session of the China Communist Party (CCP). We should also keep in mind that China’s central bank has a deep pocket to provide enough RMB liquidity if necessary,” BofA Merrill Lynch said in a research note posted by Barron’s.

While there has been ample talk of Chinese stocks being cheap, some view that sentiment as being applicable to smaller Chinese banks, including those listed in Hong Kong. The iShares MSCI Hong Kong Small-Cap ETF (NYSEArca: EWHS) has an almost 22% weight to the financial services sector and is up 3.5% in the past month. The Guggenheim China Small-Cap ETF (NYSEArca: HAO) has an almost 15% allocation to financials and has gained 4.4% in just the past week.