The initial preconception on part of foreign investors towards the developing economies being a risky investment option seems to be fading in light of the developed nations posting a respectable growth for the gone year amid an uncertain global economic environ.
Countries like China, which is on the verge of achieving Super-Power-Dom, Banks and Financial institutions play the most crucial role in advancing the growth cycle. China Financials ETF and equity exposure thus seem to be the brightest venue for investors looking east wards who are convinced with the growth outlook derived from a simple logic which is the collective earning potential of millions of soon to be upper middle class households of China.
It is now widely accepted that 21st century could witness China surpassing United States as the world's largest economy (by 2027).
International investors can achieve exposure to China in several ways as its long term growth is very promising. One easy method is through the ETF (exchange traded fund) route without perturbing about the tax liabilities and legal hassles.
Mainly there are two types of ETFS - Firstly the broad market ETFs will include stocks offering exposure to the entire Chinese economy and the second category includes a more targeted approach through industry specific and asset class specific funds offered by different companies.Then as a second option there are the American Depository Receipts (OTC:ADRS) as an investment tool offering exposure to individual companies in the country.
The health of the financial institutions in China reveals an ill state due to the negative debt accumulation and afflicted property loans. The nation's spending on infrastructure over the past few years has led to an ugly debt crisis. The local government financing vehicles (LGFVS- were an easy way of getting free from borrowing restrictions) have increased this problem as they piled upon debt during the Chinese stimulus plan around the year 2008-09.
However, one can profit under the shadow of the on-going events by shorting the troubled financial sector, although recommended only for the seasoned traders with a flare to tackle risk.
The four largest banks of the Dragon's lair often synonymous with the term 'Big Four' are well represented in the Solactive China Financials Fund. The Industrial and Commerce bank of China (ICBC) is the world's largest bank in terms of market cap and has posted a 15% net income gain in the recent months. Further, the other three major banks include Agricultural Bank of China (NYSE:ABC), China Construction Bank (CCB) and the Bank of China (BOC) and all have shown burgeoning profits in the latest quarterly filing of the 2012 financial year.
The profits earned by these four banks have risen by a remarkable 15% lately; this is three times the growth portrayed by the United States' banks. These banks were able to advance their net interest income because of the central bank's directive to increase their loan rates by 30% and give a 10% higher rate than that of central bank's rate of deposit.
The Solactive Benchmark comprises of about 36 holdings that include equities and ADRs of the key players from the China Banking and Finance Industry and Real Estate Investment Trusts [R.E.I.T.s] of the country. The first two being the priority, collectively account for 54.1% and REITs account for 27.9% holdings. The rest is shared between Insurance [17.05%] and Financial Services [0.95%].
On either side of the curve or whatever the approach may be, both bulls and bears can find investment opportunities in China's Financials sector. Broader product like Global X CHIX ETF not only gives a wide spectrum portfolio, even the volatility levels are lesser when compared to direct equity investment.
Global X China Financials ETF [CHIX] replicates the Solactive benchmark for the financial sector of China and yields as per its performance. CHIX operates at an expense ratio of 0.65 basis points and has 41% of assets in form of Large Cap Equity. Besides the top four banks, China Merchant Bank, China Overseas Land and Investment, China Minsheng Bank and China Life Insurance are also included with a close to +4 % asset allocated to each of the stock.