After the People’s Bank of China’s surprise interest rate cut last week, exchange traded funds with large exposure to big Chinese banks could benefit the most as savers turn to the safety of stated-controlled companies.
The iShares China Large-Cap ETF (NYSEArca: FXI), the largest China country-specific ETF, holds a hefty 45.7% position in the financial sector and includes heavy exposure to state-owned large-cap Chinese banks. The SPDR S&P China ETF (NYSEArca: GXC) takes a lighter position on Chinese financials at 29.1%. Additionally, the Deutsche X-trackers Harvest CSI 300 China A-Shares Fund (NYSEArca: ASHR), the first U.S.-listed ETF to offer physical exposure to A-shares stocks, includes a large 41.7% tilt toward financials. [A Bumpy Ride for A-Shares ETFs]
For a more focused approach, the Global X China Financials ETF (NYSEArca: CHIX) specifically targets China’s financial stocks. CHIX also includes a greater tilt toward large-cap names, which make up 83% of the fund.
On Friday, China’s central bank cut one-year benchmark lending rates by 40 basis points to 5.6%. Additionally, the PBoC raised the ceiling that banks can offer on deposits to 1.2 times the benchmark from 1.1 times, writes Aaron Back for the Wall Street Journal.
Theoretically, this should translate to shrinking net-interest margins due to lower lending rates and increase competition between large and small banks. The five largest state banks offer 3% for one-year deposits, compared to 3.3% for smaller private rivals.
However, the largest state-backed banks could benefit from the grater flexibility to set rates. These banks won’t have to compete for deposits since the average saver will feel these banks are safer as a government-controlled entity.
Moreover, according to PBoC data, only 20% of lending is done near benchmark rates, which are now at 5.6%. Consequently, this suggests that large state-owned banks, which only offer about 3% for one-year deposits, will likely experience the immediate benefits.
Banks could eventually extend more loans to private borrowers where they can demand higher rates. However, the large spreads between private and state-owned borrowers have persisted, suggesting banks will be slow to ditch the reliability of state-backed companies. Consequently, doing business with state-owned firms remains a common theme as safety trumps risk and potentially better returns for now.
iShares China Large-Cap ETF
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Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.