Tricky as it is! Investing in China Financial Sector may beget good returns on both side of the curve; though those only seasoned investors have the appetite for, but in any case using an inverse strategy in foreign markets calls for obvious caution & sound understanding of the local economy dynamics.
Decoding China in general & particularly the finance industry of the country give many a money making opportunity for both bearish & bullish temperaments.
Experts believe that the woes of China's economy are rectifiable through structural policy changes & are not an outcome of a cyclic procedure. This could be the reason that the Chinese Finance Markets have often shown contrast to the lagging global scenario.
Infrastructure is at its peak & has been for over a decade in China and is rightly fuelling the loaning activities of big banks like Bank of China, Commercial Bank of China [both banks now among the top four banks of the world]. The problem is that in the background a number of Local Government Financing Vehicles [LGFV] have sprouted.
These LGFVs can have undocumented customers & are known to bend the rules of borrowing to come around the restriction policies. As a check measure, the State has now decided to pass over these loans to public banks & even out the balance sheets.
As a result China Development Bank consumed nearly US$ 80 billion LGFV bad debts in the first year alone.
It is a worrying figure, but somehow amid the Euro Zone Crisis & in general the poor performance of world equity markets, most have overlooked this development.
Timely shorting a Chinese Financial Equity Traded Fund like CHIX ETF will make sense to anyone who has a bleak forecast thesis for the China Banking Sector and is not faint hearted.
What about the growth? & what will drive Investments in Chinese Financial Funds?
No doubt that the global big players like Goldman Sachs, Royal Bank of Scotland, Citibank and Bank of America [who in fact shaped China's Banking Sector to what it is today through heavy investments between 2004-2006] are all cutting their holdings in various banks of China and their selling moves are welcomed by companies like Temasek Holdings of Singapore. The Co. has bought a majority of BofA & Goldman's holdings.
What a common investor does not know is that Greg Curl a President at Temasek Holdings was also the architect of Bank of America's strategy for the China Construction Bank deal and almost became the CEO of BofA finally making way for Brian Moynihan.
Another note worthy fact is that the Industrial & Commercial Bank of China is still the world's most profitable banking institution & in terms of market value Top Ten Global Bank list includes four Chinese banks.
Banking & Insurance sector of China has no reasons not to grow, whenever that might happen?
The country which has an estimated 2.67 billion bank cards [including 230 million credit cards] and ratio wise two cards per Chinese may have some 500 - 600 million more credit cards in circulation by or before 2020.
Lending bodies like Bank of China [fourth largest lender in the country] has announced good earnings growth & forecast in wake of increased loaning activities.
Insurance sector is another flag bearer of China' growth & must maintain its trajectory in the near future.
A recent RNCOS report shows that both 'Personal Insurance Premium Income' and 'Life Insurance Premium Income' has grown close to a steady 25% in the interim period of 2008-2012.
The introduction of investment linked insurance products is only going to attract more investments, particularly at a time when an average Chinese is only warming up to this idea & breaking the traditional mould of investing only in the Bank Schemes & Real Estate.
Equity Traded Funds like Global X China Financials [CHIX] offer US investors a choice of strategy. With a Top Heavy holding structure, 41% of CHIX ETF asset allocation is in institutions like Bank of China, Industrial & Commercial Bank of China, China Construction Bank, China Overseas Land & Investment Ltd. & China Life Insurance Company.