Long second fiddle to the United States, China is racing to become the world’s largest economic power. Investors who heed the call are positioned to ride the bullish wave to handsome profits over the long term. 

Make no mistake, China has and will continue to experience growing pains, but this is part of the economic expansion process. Savvy investors have used the short-lived bearish periods to snap up equities at deeply discounted prices. 

And right now, it’s looking like the ideal time to buy into the Chinese financial sector. 

The Current State Of The Chinese Economy
Many investors were shaken by April’s nearly 3% decline in the Shanghai stock market.  The bearish volatility resulted from regulators clamping down on shadow banking and speculative trading. While short-term bearish, these moves will benefit patient investors. 

The Xinhua News Agency recently stated that the changes toward stability, “have provided a good external environment and a window of opportunity to reduce leverage in the financial system, strengthen supervision and ward off risks… Over the past week, interbank rates trended higher, bond and capital markets suffered from sustained corrections and some institutions faced liquidity pressure. However, these have little impact on the stability of the broader environment.”

#-ad_banner-#It’s this stability that is attracting copious interest in the capital markets, namely the financial sector. 

Better-than-expected data reflects an upsurge in Chinese business. First-quarter GDP growth beat expectations at nearly 7%. At the same time, the property and construction sector jumped on news of the creation of an exclusive economic zone, Xiong’an New Area, in Hebei province.

Further stabilization efforts include faster IPO approvals and increased trading of new commodities securities. 

The above improvements will help support the economy for the long run. However, what has me most excited is the boom in the Chinese banking and financial sector.

Why It’s Not Too Late To Invest In Chinese Bank Stocks 

1. Rising Interest Rates
Climbing rates mean Chinese banks can charge more for loans, and therefore earn greater profits for investors. The improved business climate will lead to increased loan demand which, when combined with tightening monetary policy, will force rates to climb. 

2. Bank Earnings Upgrades
Morgan Stanley analyst Richard Xu told Barron’s that he expects a multiyear earnings upgrade cycle in the banking sector. Barron’s reports that the analyst expects that the, “net interest margins of most Chinese banks should improve from the June quarter before undergoing a ‘rapid expansion’ in 2018 and 2019.” 

One really couldn’t hear a more bullish proclamation from a respected Wall Street source.

3. Reduction In Non-Performing Loans
Non-performing loans are the bane of the banking industry. Chinese bank shares have long suffered under the weight of an estimated 15% troubled loan rate. Improved corporate earnings are expected to lower the number of defaulted loans, as borrowers will have more cash to settle their debts. 

Political action from Beijing is also aiming to manage debt risk better as we move into the future. 

Stated simply, ramped-up regulations and a better economy will work together to lower bad debt levels.

4. Deep Value
Make no mistake, Chinese bank shares have rallied aggressively from their lows. However, the large Chinese lending institutions still trade for less than their forward book value. 

Looking back ten years, these shares traded for an average of five times their forward book value. This fact, especially combined with the sector’s average dividend yield approaching 5 percent, paints a compelling investment picture. 

5. Price Momentum
One of the primary tenets of technical analysis is that trends tend to continue in the same direction. In fact, an entire investing strategy known as trend following has sprung up around this thesis. Many of the world’s largest equity-based hedge funds embrace trend following as their primary investing tactic.

Currently, Chinese bank stocks are in an unquestionable uptrend. The major names have surged nearly 40% from their lows, creating the ideal trend following situation. 

Risks To Consider: China is notorious for shaky accounting standards and questionable corporate reporting. Only risk-embracing investors should consider investing in China. 

Action To Take: Global X China Financials ETF (NYSE: CHIX) is an ideal way to benefit from Chinese bank stock price growth. It is designed to follow a cap-weighted index of investable Chinese financial companies by investing across the market-cap spectrum. 

CHIX provides broad diversification in the financial sector by holding a portfolio of 40 companies spread across banking, real estate, and insurance. Over 30% of the fund is allocated to the big four leading Chinese banks: Bank of China, China Construction Bank, ICBC and Agricultural Bank of China.

The ETF is higher by over 16% this year and throws off a 1.7%-plus dividend yield.

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