Banking on China

10/13/2015 10:00 am EST

Focus: GLOBAL

Yiannis Mostrous

Editor, The Capitalist Times

When it comes to China, most Western investors assume the worst until proven otherwise, observes Yiannis Mostrous, editor of Capitalist Times.

This herd mentality leads to violent stampedes into and out of Chinese equities, with little regard for the economy’s long-term promise.

Without overlooking the occasional policy misstep mistake from Beijing, we’ve generally maintained a more sanguine outlook for the China’s economy, a stark contrast those who have warned of an eventual or imminent collapse.

For the past 15 years, we’ve argued against a collapse in the Mainland economy, a view that has panned out thus far.

That being said, the Chinese government has a lot on its plate, from promoting GDP growth and preventing the economy from overheating to reforming state-owned enterprises, shifting the emphasis to service industries, and integrating with the global financial system.

But China has a healthy account surplus and the major financial institutions remain under state control, giving monetary authorities the ability to create liquidity with relative ease and control capital flight.

As we’ve argued for the past two years, China’s economy is experiencing a structural slowdown after a decade of growing by at least 10% annually.

We wouldn’t be surprised if the PBOC were to cut banks’ reserve requirements again while injecting liquidity into the system through the medium-term lending facility and pledged supplementary lending for specific infrastructure projects.

Given the level of negative sentiment and the unsettled state of China’s economy and equity markets, investors shouldn’t place any new bets on the world’s quintessential emerging market.

However, we remain bullish on the long-term growth opportunities in China’s financial sector, a group that stands to benefit tremendously from the changes taking place in the country.

Bank stocks look particularly appealing because of their undemanding valuations, though shares of real estate companies and insurers also look attractive.

US-based investors can gain exposure to this trend via Global X China Financials (CHIX), an exchange-traded fund that offers diversified exposure to China’s financial sector.

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