Weakening Banks Could Pressure Financial-Heavy China ETFs | Page 2 of 2 | ETF Trends

Given the current slowdown in China’s economy, Barclays analyst May Yan argues that the sector-wide profit growth will continue to slow to just 3% next year. Additionally, banks could see margins squeezed if Beijing pushes on with interest-rate liberalization, which would force banks to compete for deposits.

“Looking forward, as the government shifts the drivers of growth from capital investment to consumption, these state-controlled firms might find their oligopolies (and profits) a little less secure,” according to Morningstar analyst Patricia Oey. “In the banking sector, the government recently loosened its control over lending rates to stimulate competition among banks and provide more credit to the private sector. Within the next few years, the liberalization of deposit rates (an important step for China’s planned transition to a consumer-led growth model) will follow.” [Behind the Ignored Rally in China ETFs]

However, China’s financial sector is not in immediate danger as the state-owned companies are still backed by the government. Moreover, Chinese banks are still among the most profitable companies in the world.

The Industrial & Commercial Bank of China is the most profitable company in the world, USA Today reports. Four Chinese banks are also among the top ten most profitable global companies.

For more information on China, visit our China category.

Max Chen contributed to this article.