China’s banking sector is weakening as profit growth slows, nonperforming loans rise and years of stimulus-driven ending begin to end. Consequently, investors looking into China-related exchange traded funds should monitor their financial sector exposures.
For instance, the iShares China Large-Cap ETF (NYSEArca: FXI) is the largest China country-specific ETF and allocates a hefty 48.4% tilt toward the financials sector, and the slightly more diversified SPDR S&P China ETF (NYSEArca: GXC) includes a 30.1% weight toward financials. In comparison, the Powershares Golden Dragon Halter USX China Portfolio (NYSEArca: PGJ) only allocates 2.0% toward financial stocks but overweights tech companies at 52.6% of its portfolio. Year-to-date, FXI has increased 3.9%, GXC gained 1.5% and PGJ rose 1.2%.
The Global X China Financials ETF (NYSEArca: CHIX), which targets China’s financial stocks, has dipped 0.6% year-to-date.
On Wednesday, the Industrial & Commercial Bank of China, the country’s largest lender by assets, revealed that net profits increased at a slightly better-than-expected 7.7% in the third quarter year-over-year but was still down from the 10.1% growth for all of last year, reports Aaron Back for the Wall Street Journal.
The bank is experiencing declining growth as the balance of nonperforming loans jumped 23% from the end of last year. Meanwhile, the provision coverage ratio, a measure of loan-loss charges taken against nonperforming loans, declined to 217% from 257% – a higher ratio indicates a better ability to fulfill obligation to lenders.
Bank of Communications, or Bocom, revealed net profits was 6.3% higher in the third quarter, or below expectations and slightly down from 6.8% growth last year. Nonperforming loans increased 19% from 2013 while provision coverage ratio fell 12 percentage points to 201%.
Looking at the ETF holdings, FXI’s portfolio includes a 7.1% position in Industrial & Commercial Bank of China and 1.7% in Bank of Communications. GXC includes Industrial & Commercial Bank of China 5.1% and Bocom 1.3%. CHIX has a 10.1% position in Industrial & Commercial Bank of China. [How to Use China ETFs]