Saying Chinese stocks and the corresponding exchange traded funds have recently been on fire is an understatement.
Over the past month, benchmark China ETFs such as the iShares China Large-Cap ETF (NYSEArca: FXI) and the SPDR S&P China ETF (NYSEArca: GXC) are each up more than 17% while the Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (NYSEArca: ASHR), which tracks mainland Chinese A-shares, is higher by 23.5%.
On Wednesday, 11 China ETFs hit all-time highs, a group that includes the Global X China Financials ETF (NYSEArca: CHIX). CHIX is up nearly 18% in the past month, which in its own right is impressive. However, the ETF’s ascent is even more impressive when considering the spate of recently trying headlines affecting Chinese banks, a group that is a staple in scores of emerging markets ETFs.
Recent bullishness for CHIX has been accrued against the backdrop of dividend cuts from Chinese banks. Amid rising bad debt, three of China’s four largest banks last week announced payout cuts with one, China Citic Bank Corp., scrapping its dividend altogether, according to Bloomberg. [EM Dividend ETF Bounces Back]
Add to that, pay cuts and restrictions have sparked a spate of executive departures at the Bank of China, Bank of Communications, and China Construction Bank, among others. Bank of China and China Construction are CHIX’s two largest holdings, combining for 19.3% of the ETF’s weight.
The dividend cuts have, predictably, affected the yield on CHIX. In October 2013, the ETF yield almost 3%, but the current trailing 12-month yield is closer to 1%. [Global ETFs With Surprise Yields]
Investors have not been deterred. With $94.3 million in assets under management as of April 7, CHIX is not in the conversation about the biggest China ETFs. However, it cannot be ignored that nearly a third of those assets have come into the fund this year.
An accommodative People’s Bank of China’s, which is among the more than 20 global central banks to cut interest rates this year, could be a positive catalyst for CHIX and the ETF’s constituents. 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.
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.
Global X China Financials ETF