Photo: AFP/Isaac Lawrence

The China H-shares rally overnight and during the past week is very much a financials affair. Of the top 10 performers, five are banks, including all the four major state-owned banks. At the top of the list, though, is Dongfeng Motor Group.

The banks are so cheap that they practically represent a distressed investment trade. China Construction Bank for example is selling at just 6X earnings with a nearly 5% dividend yield. That compares to the Euro Stoxx banks index selling at 12.5x forward earnings and the US banks index BKX selling at 14.5x forward earnings.

The enormous risk premium on Chinese banks, selling at half the value of their Western peers, may be justified, but it’s a matter of degree. If China doesn’t have a financial crisis the banks will turn out to be bargains.