China's bank move mollifies but experts doubt stimulus
Share
China’s move to prop up the share price of its four biggest banks was initially well received by the market last week, but commentators are divided over how likely a repeat of 2008’s stimulus will be.
Central Huijin Investment, the domestic arm of China’s sovereign wealth fund, started adding to its holdings in Agricultural Bank of China (ABC), Industrial and Commercial Bank of China (ICBC), Bank of China (BOC) and China Construction Bank (CCB) last Monday.
Although the actual transactions were relatively small - the purchases in the four institutions totalled just Rmb197m (£19.8m) - Huijin suggested this was the start of an ongoing process to build up their positions in the banks.
The country has previously publicly intervened in the market in a similar manner. In September 2008, Huijin bought shares in three major Chinese banks to bolster a stockmarket rally and the authorities quickly followed up by announcing a major stimulus initiative.
Mike Sell, the co-manager of the £20.3m Thames River Emerging Asia fund, says the new move appears to be a signal that the Chinese government considers the market too cheap.
Valuations in Chinese financials recently fell below the level seen during the global economic crisis, which seems to have prompted Huijin’s reaction.
The news had an immediate impact on share prices, with ABC closing 12.8% ahead on the day of the purchases last Monday. BOC rose 7.7% and ICBC climbed 6.7%. However, not all commentators are convinced on the initiative’s effectiveness.
Frances Hudson, a global thematic strategist at Standard Life Investments, says the latest move has failed to replicate the success of 2008’s action, which saw the Shanghai Composite Index rally more than 20% within a week.
“That could be because investors no longer place that much reliance on governments’ ability to sort out banking problems, whether they’re in Europe or China,” she says.
Hudson suggests that the plan has “psychologically misfired”. The markets have failed to interpret the purchases as an indication that the government will support its banking system on an ongoing basis and instead see them as an admission of underlying problems.
Worries over some aspects of the Chinese banking system are not new. This year, Moody’s Investors Service and Fitch Ratings both said the value of non-performing loans held by the country’s banks might be significantly higher than official estimates.
Alaistair Chan, an economist at Moody’s Analytics, says bad debt, especially that raised by local governments, is the chief source of concern over China’s banking system.
Non-performing loans account for 2% of the loans issued by the country’s major banks, according to official estimates. However, Chan says this could rise to between 8% and 12% once local government debt is properly accounted for.
This uncertainty over the health of loans held by banks drove the recent falls in share prices and ultimately led to Huijin’s intervention, the economist adds.
Michael Godfrey, the co-manager of the £510.1m M&G Global Emerging Markets fund, agrees: “The move by the Chinese government to shore up [the banks’] balance sheets is in large part because of what we’ve seen in recent years - this lack of control over lending.”
Problems in the Chinese financial sector, however, are not confined to bad debts. Hudson points out that an “awful lot” of banking in the country does not flow through official channels, as the established system fails to sufficiently service the consumer or the small business sector.
In June, Nomura estimated that the value of loans issued through this shadow banking system is Rmb8.5 trillion and amounts to about 21% of GDP. It added that the market is “rightly concerned” about the issue.
Hudson says: “If there are particular stresses, then you wouldn’t necessarily see it [in the conventional banking system].”
Godfrey adds it is “virtually impossible” to hold an accurate view on the problems that may be lurking in the shadow banking system, bar what can be gathered from anecdotal reports from domestic businesses such as property firms and industrial companies.
The suspected bubble in Chinese property further compounds these problems. Hudson claims that a large volume of the country’s informal lending has gone into real estate and says if the bubble bursts, the resultant crisis “is going to be a big one”.
Whether Huijin’s commitment to the major banks will lead to a sustained rally remains to be seen. However, some commentators have noted that 2008’s recovery came at a time of general stimulus from central authorities, suggesting it may have had little to do with the market invention.
”If there are particular stresses, then you wouldn’t necessarily see it [in the conventional banking system]”
Conditions this time around are very different. China’s stimulus in 2008 was launched at the tail end of a recession and against a backdrop of action on the global stage.
Chan says the market appears to suggest the Chinese government lacks the firepower to undertake further stimulus if it has to act alone and in an environment in which global growth is faltering.
Bank lending was essential for China’s Rmb4 trillion stimulus programme in 2008, but rising bad loan rates will significantly impede the government’s ability to embark on such measures now, he explains.
Hudson agrees that any new stimulus from China will be different from past attempts. She says the country’s recent efforts suggest it is trying to fine-tune its intervention to prevent unchecked credit growth across the system.
Sell suggests China may target specific problems in individual areas rather than attempt to stimulate the whole economy. Rising property prices and the lack of lending available to small businesses are two areas were further intervention could be seen, he says.
One choice still open to the government is to issue bonds and finance extra stimulus spending out of its own debt, Chan notes. This could even occur on a local level, as Guangdong and Zhejiang provinces and Shanghai and Shenzhen municipalities recently announced a trial programme of issuing their own bonds.
However, Chan concludes that the credit-driven super-stimulus of 2008 - which some regard as rescuing global growth - is unlikely to be repeated during the current rough patch.
To receive more relevant articles like this one, why not sign up to our briefings and breaking alerts by clicking here and Follow @fundweb
