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Central Huijin’s move to purchase shares in the four large state-owned commercial banks yesterday has attracted a lot of attention from investors concerned about the stability of China’s financial system. The value of bank stocks are down by a third over the year, which much of the decline occurring over the past several months.
Huijin purchased 39.1 million shares in Agricultural Bank of China, 14.6 million in ICBC, 7.38 China Construction Bank, and 3.5 million shares in Bank of China. If sold at market values, these purchases would amount to around 200 million RMB. The direct effect on Huijin’s ownership levels in these banks will be small, given the number of outstanding shares is in the hundreds of billions.
Just to recap, Huijin is already the majority of these banks (2 directly and 2 indirectly via the Ministry of Finance). Huijin itself is owned by China Investment Corporation which in turn is controlled by MoF.
Many analysts are attributing the move by Huijin as a way to boost confidence in the banks. These banks have come under increasing scrutiny as the full extent of local government debt problems has become known. The negative impacts from a weak global economy and lingering concerns about a hard economic landing in China have also worsened the outlook for the banks. Fortunately, Chinese banks have minimal exposure to the debt crisis currently dragging down European banks.
A more difficult problem to resolve, and an important drag on banks shares, is shareholders’ fear of dilution. New capital adequacy rules have put Chinese banks under pressure to raise capital. This situation has been made even more difficult by MoF’s insistence that the banks to pay high levels of dividends. Over the past two years, the big four commercial banks have raised 622 billion RMB in new capital through bonds and share offerings while paying out 402 billion RMB in dividends.
Additional recapitalization will come through a mix of bond issuances and share offerings. Knowing that these capital raising measures are looming in the near future, investors have discounted the value of the existing shares of these banks, despite Chinese bank executives public efforts to quell investors’ fears of dilution. Banks are expected to raise another 500 billion RMB in the coming years in order the meet the heightened capital requirements.
Also weighing on investors’ minds is that lock-up periods for the banks shares owned by many big strategic investors have expired or are close to expiring. Some of these strategic investors, such as Bank of America and the Chinese National Social Security Fund, reduced their stakes soon after their lock-up periods expired.
Given all these headwinds, it’s unsurprising that Chinese bank stocks have taken a beating. However, as in 2008 and 2009, Huijin has not revealed the amount of support it will provide over the coming year.