China has been actively lower its debt levels, which in turn has helped bolster third quarter results of the emerging market’s large state-owned banks and financial-related ETF.
The Global X China Financials ETF (NYSEArca: CHIX), which provides broad exposure to companies in the Chinese financials sector, gained 8.0% over the past three months and surged 40.5% year-to-date.
Chinese regulators have made it more expensive for banks to borrow from one another in an attempt to diminish risks in the financial sector, the Wall Street Journal reports.
The action has benefited the big state banks since their vast retail deposit franchises lend to other lenders while the smaller banks have to struggle with higher funding costs.
For example, Industrial & Commercial Bank of China revealed its profits jumped 3.4% in the third quarter year-over-year, compared to its 1.85% profit growth over the first half. Over the past two years, the bank revealed near-flat net profit on a buildup of bad loans that ate away at earnings and narrowing interest rates cut into profitability.
Furthermore, Agricultural Bank of China announced net profit rising 4.9% in the quarter, its fastest clip in the past two years.
“The Big Four banks are faring well as liquidity tightens and funding costs rise given their vast deposit bases,” Yulia Wan, a bank analyst with Moody’s Investors Service, told the WSJ. “But the banks with bigger reliance on the interbank market are under higher pressure in net interest margin.”
Higher market rates, or the difference between interests received and paid by banks and a key measurement of Chinese lenders’ profitability, have helped stabilize the big lenders’ net interest margins. Three of the big four banks have revealed wider net-interest margins in the third quarter, whereas small banks’ margins narrowed.
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Further supporting the Chinese financial sector, China is expanding faster-than-expected this year, which has helped bolster balance sheets, notably among those heavily-indebted industrial segments, and made them better able to service loans.
ETF investors interested in targeted exposure to the Chinese financial segment can look to something like CHIX. The fund’s top holdings include big Chinese names like Ind & Comm Bank of China 10.6%, AIA Group 9.7%, China Construction Bank 9.4%, Ping An Insurance 6.2% and Bank of China 4.3%, among others.
Broad China country-specific ETFs also include heavy state-owned, financial sector weights. For example, the iShares China Large-Cap ETF (NYSEArca: FXI) has a 53.0% tilt toward financials, including 8.8% China Construction Bank, 7.9% Industrial and Commercial Bank of China and 5.3% Ping An Insurance among its top holdings.
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