A Billion Waiting to Be Served
Nick is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Prior to joining Global X Funds, Alex Ashby lived and traveled extensively throughout Asia. He currently manages a group of six ETFs covering the consumer, energy, financial, industrial, material, and technology sectors of the Chinese economy. The Global X China Financials ETF (NYSEMKT CHIX) provides investors with exposure to financial companies in China and is designed to be a transparent, cost-efficient way to get access to the growing demand for energy within the country.
Nick Slepko: What surprised me most looking at your ETF’s holdings is that it has less DRs than your China tech or China consumer ETFs. In other markets, it is usually the financial enterprises that list DRs first, and then the rest of the economy follows. Is there a reason financial stocks in China are not in a hurry to attract international investment?
Alex Ashby: I think when you are looking at the financial sector in China, the fact that the big four banks are state-owned enterprises reduces the need for these companies to list ADRs and target foreign investors. In contrast, if you are a rapidly growing technology player like Baidu (NASDAQ: BIDU) and may not have access to the same kinds of government resources, the appeal of a foreign listing is much stronger and is why I think you see more ADRs from Chinese companies in those types of sectors.
Slepko: Does your China Financials ETF have a cap because Industrial and Commercial Bank of China (OTCPink:IDCBY)(NASDAQOTH:IDCBY), Bank of China (OTCPink:BACHY), and China Construction Bank (OTCPink:CICHY) seem to be leveled out at 10% each?
Ashby: All of the China sector ETFs are market-cap weighted, but there are certain diversification requirements that need to be met in order to ensure that each fund is not overly concentrated in a few companies – this is actually a listing requirement that applies to all ETFs. In order to meet these requirements, in some cases the companies at the top need to be capped at a certain level, which is why you see several of the top holdings in CHIX right around 10%. However, this weighting is not fixed and can fluctuate depending on market movements.
Slepko: After the banks, a couple other of the larger holdings are China Life Insurance (NYSE: LFC) and Ping An Insurance (NASDAQOTH: PNGAY). Considering that if the insurance industry is operating properly and paying out to clients, the impact of natural disasters and pollution, along with China’s life expectancy ranking 96th in the world (to the US’s 51st), and 125th (to 84th) in rate of deaths, it doesn’t seem like the future Chinese Warren Buffett is going to have as much float to work with. So while HSBC (NYSE: HSC) has been attracted to Ping An, and is the largest confirmed shareholder in the company, its stake seems motivated by political factors as much as an interest in being part of Ping An’s financial services division, rather than its insurance activities.
Ashby: With a population of over a billion, there is definitely going to be demand. But it is also an area where government policy will have a huge effect – this is not unique to China and is something we see here in America as well. So, in this sector, watching reforms made by the new leadership will be particularly important. And it looks like they are not wasting any time in making changes – last week regulators announced that they were abolishing a rule that limits insurance companies’ investments in commercial banks, which analysts believe will allow the insurers to better manage their own risks. China Life Insurance was up 10% on the news and Ping An rose almost 5% - another demonstration of investors reacting positively to reform and liberalization of current policies.
When thinking about insurance in the country, something to consider is that China is still an emerging market and there is still a lack of a reliable social safety net, which is one reason why you see significantly higher levels of personal savings in the country even compared to other emerging markets. People put away their money in anticipation of having to deal with disasters, accidents, and the unforeseen. One of the positive impacts of developing the insurance industry in China will be its knock-on effects on the consumer side as people begin to feel more secure. Insurance in China is in very early stages, but the domestic providers are very well-positioned for future growth – a recent PwC report indicated that domestic insurance companies currently control almost 96% of the life insurance market in China and nearly 99% of the general insurance market. Not a bad position to start from in a market where analysts expect growing premiums and higher demand.
Nick Slepko (hukgon) has no position in any company mentioned here at the time of publication. The Motley Fool owns shares of Baidu. Motley Fool newsletter services recommend Baidu. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!