Chinese economy

Beijing intervenes to help stabilise banks

Financial Times

10October, 2011

The Chinese government will boost its stakes in the country’s largest banks, as it attempts to shore up slumping financial stocks and to restore investor confidence.

Central Huijin, the domestic arm of China’s sovereign wealth fund, will purchase shares in Agricultural Bank of China, Bank of China, China Construction Bank and Industrial and Commercial Bank of China, the official Xinhua news agency announced on Monday. Xinhua added that the purchases by Huijin – its first such public intervention since a similar decision at the onset of the financial crisis three years ago – would “support the healthy operations and development of key state-owned financial institutions and stabilise the share prices of state-owned commercial banks”.

The announcement came too late for the Chinese stock market, which had closed at a 30-month low, but had an immediate effect on late trading in Hong Kong. ICBC’s Hong Kong-listed shares, which had been down 3 per cent, rallied to close up 1 per cent.

Analysts said the sharp rebound may have partly reflected short covering. Chinese bank shares have fallen 30 per cent during recent months.

“They [Huijin] are trying to signal to the market that they feel confident,” said Sanjay Jain, a Chinese bank analyst with Credit Suisse. “And of course valuations are depressed, so it’s not a bad idea to buy at these levels for a long-term strategic investor.”

Although Chinese growth has so far held up well, the European debt crisis and fears of a double-dip recession in the US have cast a shadow over the country’s economic prospects. With inflation running near three-year highs and debt levels swollen by heavy spending, economists doubt that Beijing can launch another massive stimulus programme, as it did when the global financial crisis struck in 2008.

Beijing also allowed the renminbi to record its biggest one-day gain in years on Monday. It rose 0.6 per cent against the dollar, squeezing traders who have been betting that the currency will weaken in tandem with a slowing economy.

The motivation for the sudden appreciation appeared to be diplomatic. The US Senate is poised to vote on Tuesday on legislation that would punish China for deliberately undervaluing the renminbi.

The government, by means of Huijin, is already the majority shareholder in all of the country’s important banks. The Xinhua announcement gave no details about how many more shares the fund intends to buy.

Investors have turned against China, driving down commodity prices and dumping Chinese bank shares. Global investors worry that bad debt levels will soar because of a lending spree that began in 2008. To short Chinese bank shares in Hong Kong has become a popular play for investors betting that the world’s fastest-growing major economy will soon slow.