Wealth Management Regulations Weigh on China Bank ETF
Shares of the Global X China Financials ETF (NYSE: CHIX) are trading lower by almost 1.7 percent Thursday after Chinese regulators moved to curb proliferation of opaque wealth management products in the world's second largest economy.
Most of the wealth management products, which are sold to investors looking to add some yield to their portfolios, contain government and corporate bonds, as the Wall Street Journal reported. Still, others are backed by more complex investments such as real estate loans, gold and even pricey jewels, according to the Journal.
Since China keeps interest rates for basic bank deposits low, the wealth management products have surged in popularity. By some estimates, the amount held in the controversial instruments was a quarter of Chinese GDP last year.
Concerns about the products' liquidity and the risk they pose to Chinese banking system at large prompted new regulatory action. The China Banking Regulatory Commission said on Wednesday that banks must clearly link wealth-management products with specific assets, the Journal reported. Banks must also disclose who is using the products and audit each product.
The news has clearly had an adverse impact on CHIX today. Interestingly, the Journal points out China's four largest banks – Bank of China, Industrial & Commercial Bank of China Ltd., China Construction Bank and Agricultural Bank of China – only issued 28 percent of all wealth management products in China last year. That quartet of banking behemoths combine for over 34 of CHIX's weight.
For its part, CHIX is not entirely allocated to bank stocks. Real estate and insurance stocks combine for over 42 percent of the ETF's weight, according to Global X data. With today's slide, CHIX is down nearly 12 percent year-to-date.
The iShares FTSE China 25 Index Fund (NYSE: FXI), the largest, most heavily traded China ETF, is also being hit on the news. FXI is off 1.4 percent today. China's big four banks are all found among FXI's top-10 holdings and the financial services sectors accounts for almost 57 percent of that ETF's weight.
FXI is also down about 12 percent this year. Regarding CHIX, if nothing else, it can be said the ETF is cheap with a P/E ratio of 7.33 and a price-to-book ratio of 1.04, according to Global X data. That compares to FXI's P/E of 13.14 and a price-to-book ratio of 1.68.
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