China Financials: Dividend Narratives
- Share prices of China banks have been volatile but this should reverse once resolutions are reached
- China banks demonstrate ability provide steady income through attractive yields of 6%-7%
- Investments in China H-shares listed banks since 2010 would have generated a total return of 60%
Share prices of China banks have experienced volatility over the past months (Figure 1). This is primarily due to news regarding certain groups of homebuyers’ refusal to service their mortgage obligations on unfinished residential projects amid suspension of construction works and delayed deliveries by a number of cash-strapped developers.
Investors may be wondering what the impact of the boycott in mortgage repayments are on the banking sector as these repayments are used to fund the working capital of real estate developers.
Headline news have painted a cautious picture of the impact to real estate and its related sectors. However, the direct real estate sector as a percentage of China GDP is low at 6%-7% since 2010.
Our fundamental investment thesis on China banks is predicated on their ability to provide steady income through attractive yields of 6-7% which fit well on the income side of the CIO Barbell Strategy. Over the past few years, China banks have endured economic challenges brought about by the pandemic and have maintained dividend payments. It remains a strategically important sector to the government.
We believe the recent issue of select homebuyers’ refusing to service their mortgages should not pose any inherent long-term risk to China’s overall economic trajectory and the banking sector.
Figure 1: China banks
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