China-Focused ETFs Could Be Vulnerable, As Chinese Insurer Warns Of Defaults

May 18, 2017 12:24pm NYSE:FXI

Image of a traditional Chinese building

The iShares FTSE/Xinhua China 25 Index ETF (NYSE:FXI) is in focus today, amid a serious warning from one of China’s largest insurers amid a country-wide crackdown on financial risk.


The FT reports that the insurer, Foresea Life, could be in danger of massive redemptions unless it can issue new products again:

In a letter to China’s insurance regulator seen by the Financial Times, Foresea Life Insurance warns that the company expects Rmb60bn ($8.7bn) in redemptions this year and might be unable to meet payouts unless it is able to sell new products.

Back in December, Foresea was banned for three months from applying to sell new products. The China Insurance Regulatory Commission followed that move by banning the company’s chairman, Yao Zhenhua, from the entire industry for ten years. Zhenhua is considered to be the fourth richest person in China.

Now, in an April 28 letter to regulators, Foresea said it needed to be able to sell new products “in order to avoid inciting mass incidents by clients and localised and systemic risks, producing greater damage to the industry.”

The bigger issue here is that Foresea is far from the only problem facing what looks like a large and troubled shadow banking system in the far east. From ZeroHedge:

[W]hile fraud and embezzlement are both endemic in China, the bigger concern raised by the article was the threat of a bank run across China’s massive and unregulated, nearly $10 trillion shadow banking system. Indeed, while there have been numerous allegations and warnings that China’s entire shadow banking facade, dominated by WMPs and other “investment products”, is nothing but a giant ponzi scheme in which recoveries – should there be a bank run, a topic recently discussed on Bloomberg – would be non-existent if there is ever a bank run, defaults of WMPs issued by big banks – and this case an unapproved WMP – are rare, as are shadow bank runs.

Investors are well advised to watch the Chinese markets and linked U.S. listed ETFs in the coming weeks and months as this situation continues to develop.

The iShares FTSE/Xinhua China 25 Index ETF (NYSE:FXI) was trading at $38.94 per share on Thursday morning, up $0.02 (+0.05%). Year-to-date, FXI has gained 12.19%, versus a 5.67% rise in the benchmark S&P 500 index during the same period.

FXI currently has an ETF Daily News SMART Grade of A (Strong Buy), and is ranked #1 of 32 ETFs in the China Equities ETFs category.


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