After two and a half months, it would be reasonable to expect the bounce in the largest China exchange traded funds would be getting more attention.
That is not the case and investors apparently need more convincing regarding the efficacy of the China ETF rally because on an aggregate basis, the three largest U.S.-listed China ETFs have lost assets since mid-March when the funds started turning higher.
Since March 17, the iShares China Large-Cap ETF (NYSEArca: FXI) has gained 12.2%, outpacing the iShares MSCI Emerging Markets ETF (NYSEArca: EEM) by 240 basis points over that time. The iShares MSCI China ETF (NYSEArca: MCHI) and the SPDR S&P China ETF (NYSEArca: GXC) have also been solid over that period, posting an average gain of 7.1%.
China ETFs have been bolstered, in part, by Beijing’s efforts to support growth through easier lending requirements. China’s policy makers will “appropriately” lower reserve requirements for banks that have extended loans to rural borrowers and smaller businesses, Bloomberg reports.
Additionally, the State Council plans to reduce social financing costs and maintain reasonable growth in credit and social financing in light of “relatively large” downward economic pressure. [New Bank Requirements Help China ETFs]
Still, investors appear skittish about China ETFs as highlighted by two important anecdotes. First, despite its impressive run since March 17, FXI is still the worst performer among the four major single-country BRIC ETFs. Even the Market Vectors Russia ETF (NYSEArca: RSX) has outperformed FXI over that time. [Rush to Russia ETFs]
Second, investors have pulled more than $704 million from FXI, the largest China ETF, since March 17. GXC and MCHI have combined inflows of almost $59 million, but that clearly is not enough to balance out the $704 million that has departed FXI.
Concerns remain about China’s asset backed securities market, shadow banking and a bloated property market, but Chinese banks have shown noticeable signs of strength. Earlier this year, China Construction Bank, Industrial and Commercial Bank of China, Bank of China and Agricultural Bank of China posted average dividend growth of 12%, according to WisdomTree.
“The four banks averaged an ROE of 20.6%, which was (i) 11.6% higher than that of the developed world banks, (ii) 8.6% higher than the emerging market banks, and (iii) more than twice as profitable as their U.S. bank counterparts,” said WisdomTree Research Director Jeremy Schwartz in an April research note. [WisdomTree: China’s Banks Boost Dividends]
FXI allocates almost 56% of its weight to the financial services sector. MCHI and GXC have financial services weights of 37.1% and 31%, respectively.
Additionally, there is a solid dividend case for China, which is now the largest emerging markets dividend payer in dollar terms.
Research from WisdomTree notes that of the 76 Chinese firms in the WisdomTree Emerging Markets Dividend Index, 54 recently boosted payouts. Research analyst Tripp Zimmerman points out that aggregate dividend growth for those 76 companies “was 10.7%, or an increase from $25.2 billion to $27.9 billion.” [China’s Dividend Growth]
iShares China Large-Cap ETF
Tom Lydon’s clients own shares of EEM.