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The real reason to own Chinese financials

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FXI_allocation-thumbI came across an article on TheStreet.com suggesting that the iShares FTSE/Xinhuna 25 Index Fund (NYSE:FXI) is financial heavy and thus should be ignored. The argument goes that Chinese financials are more risky then the rest of the market and thus it's not worth taking the additional risk. (The Real Reason to Avoid Chinese Financials)

 

iShares FTSE/Xinhua 25 Index Fund (NYSE:FXI) Portfolio allocation as of 1/31/2009

FXI_allocation

The writer was certainly right pointing out that the FXI is heavy weight in financials. But simply ignoring this ETF is a mistake in my opinion for the following reasons:

 

  1. American investors have zero choice when it comes to Chinese financial stocks. There is not a single Chinese bank to speak of that is listed either on the NYSE or the NASDAQ. So in order to get financial exposure, FXI is a great way to go.
  2. Exposure to financials is a great way to invest in China because of opaque corporate governance. While over 5,000 stocks are listed in Shanghai and somewhat less in Hong Kong, western investors get cold feet when it comes to local smaller cap Chinese companies. To believe in the Chinese growth story is easy, but to separate the darlings from the dogs is a whole new ballgame. As a result, many westerners tend to buy into financials since these companies are lending to those less transparent companies, doing all the legwork for investors. Besides this work, western investors benefit from strong money flows as well, further propelling Chinese financials.
  3. While the FXI is heavy in financials its single largest allocation is China Mobile (NYSE:CHL) with a 9.06% weight plus has and China Telecom (NYSE:CHA). Then it gives investors access to the largest Chinese coal miner, China Shenhua Energy (HKG:1088), otherwise unavailable for American investors.
So to suggest that the best is avoiding the iShares FTSE/Xinhua 25 Index Fund (NYSE:FXI) is not only wrong but hurts intellingent investors. Don't avoid it, just use it for the right reason. To allocate into financials and get exposure to otherwise untouchable stocks.
Wish you successful investing.

 



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