Ominous Exodus from Chinese Bank Shares

For background information, please refer to this Standard news report and this Financial Times report.

Here is my translation of the article:-

“Recently on the Hong Kong stock market, the shares of Bank of China and China Construction Bank were hammered by rounds of aggressive offloading by strategic foreign investors. At the same time, prices of almost all other listed Chinese bank shares plummeted as a result. Some people referred to this as a ‘Hong Kong stock market earthquake’ as the New Year began.

After the incident, in order to play down the gloominess of the matter, spokespeople from Chinese banks have explained that the reason was due to the financial quandary that the strategic foreign investors found themselves in, in face of the current global financial meltdown. But this is hardly a rational explanation.

It is true that many financial institutions are having trouble raising cash in the midst of the world financial crisis. Their need to shrink their business scope is also credible. However, as a percentage of the total investments of these large strategic investors, their Chinese bank share holdings should not be anything significant. Thus from their financial viewpoint, to retain such holdings should not be too much of a problem. Besides, the current market prices of Chinese financial stocks are already at a low level – for the strategic investors to pull out of those stocks now cannot have been an easy decision to make.

As a matter of general knowledge, it would be normal for any economic entity, when deciding to downsize, to start cutting those businesses that are least profitable or that have least potentials. Regardless of how precarious the situation is, investors who have strategic vision would try to retain in their portfolio investments that are of relatively better strategic value. More importantly, when they first invested in China’s financial sector, what attracted them was not short-term return but medium- to long-term strategic benefit. From this perspective, aggressive reduction in strategic investments in China’s financial stocks would signify the world financial institutions’ loss of confidence in the future of China’s economy, in particular, her finance sector.

In fact, overseas institutional investors are not the only ones who have lost confidence in China – even the Chinese nationals themselves do not feel good about her economic future. It is not hard for people to notice that the Chinese authorities in recent months would rather use huge amounts of foreign reserves to increase holdings of U.S. treasury debt than use the funds to repurchase Chinese bank shares that were being dumped on the Hong Kong stock market. Had they taken the latter course of action, those shares would not have been subjected to a freefall. This shows that the Chinese government, being the majority shareholders of the banks, has in fact more confidence in the debt repayment ability of the U.S. as a nation, which is the very place where the financial crisis originated, than in the future of financial institutions under its control.

Foreign and domestic investors have good reason to lose confidence in China’s financial sector. Although the government has announced a stimulus package worth 4,000 billion yuans to be spent over two years, insiders would know that the watery content of this package is huge – the Chinese government is incapable of finding the 4,000 billion of hard cash. Thus her stimulus package cannot be compared apple-to-apple with other countries’ fiscal stimulus packages.

Based on the policies that are being introduced of late, most of the 4,000 billion-yuan package will be raised in the form of local governments forcing banks to lend to the private sector. In the course of dealing with any crisis, local governments have always played a guiding role. And such government-led initiatives are usually a serious negative factor on investment returns and loan repayments. Thus it would not be hard to foresee that after a while the bad debts on Chinese banks’ balance sheets would rise significantly. And this would have a catastrophic impact on China’s overall economy. To put it another way, this is the real reason why foreign strategic investors have been withdrawing from Chinese bank share investments.”