In an attempt to ease concerns and fears that rising inflation could damper economic growth, China raised bank reserve requirements for the third time in the last five weeks, influencing the Global X Financials ETF (CHIX), the iShares FTSE/Xinhua China 25 Index Fund (FXI), the SPDR S&P China ETF (GXC) and the Guggenheim China All-Cap ETF (YAO). 

The Chinese Central Bank raised the reserve requirement ratio by 50 basis points after earlier data showed a rise in property prices for a third straight month, an increase in both exports and imports, significant increases in M2 money supply and jumps in new lending by financial institutions despite government efforts to stem the flood of liquidity into the nation’s economy. 

This move by the central bank, which takes effect on December 20th, effectively reduces the amount of money China’s banks have available to lend and aids in decreasing money supply, which further helps fight inflationary pressures.

Inflation is of major concern in the world’s fastest growing economy as remain a primary challenge in China.  Some forces that continue to add to inflationary woes in China include strong export growth despite an overheated domestic economy, excessive liquidity as a result of massive amounts of money coming from both domestically and abroad, rising food and commodity prices around the world and the loose monetary policies implemented by the US which are resulting in increased money supply of the Dollar.  In fact, it is estimated that China’s consumer price index is expected to rise at its fastest pace in more than two years, jumping by nearly 4.7% from a year earlier.

At the end of the day, as mentioned above, increasing bank reserve requirements reduces a Chinese bank’s ability to lend and therefore aids in decreasing money supply in the nation’s economy.

  • Global X Financials ETF (CHIX), which is a pure play on the Chinese financial sector.
  • iShares FTSE/Xinhua China 25 Index Fund (FXI), which allocates nearly 47.7% of its assets to financials.  Some of its top holdings include China Construction Bank, Ind. & Comm. Bk Of China and Bank of China.
  • SPDR S&P China ETF (GXC), which allocates nearly 33.3% of its assets to financials and boasts China Const Bk as its top holding.
  • Guggenheim China All-Cap ETF (YAO), which allocates nearly 33.7% of its assets to the financial sector.

Disclosure: No Positions

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