Rally puts ICBC on top of the world

Tax cut, rate rise fail to halt mainland stocks

Industrial and Commercial Bank of China is on top of the world after investors drove mainland stocks to a one-month high yesterday and the bank's share price to a level that made it the world's biggest lender by capitalisation.

Not even the central government's decision on Friday to raise interest rates and cut the tax on savings could stop buyers from pushing up share prices.

The Shanghai Composite Index advanced 154.51 points or 3.81 per cent to 4,213.36, the highest since June 21. The benchmark Shenzhen index jumped 56.87 points or 5.06 per cent to 1,187.95, the highest since June 22.

ICBC's A shares closed 2.68 per cent up at 5.75 yuan, giving the lender a market value of US$254 billion, according to a Reuters calculation of the bank's A shares. In comparison, Citigroup shares rose 1 per cent to US$51.23 at noon yesterday on Wall Street, giving it a market value of US$253.3 billion.

ICBC has 334.02 billion shares outstanding, including 83 billion traded in Hong Kong. Its Hong Kong-listed shares closed at HK$5.03 yesterday, a 16 per cent discount to the yuan-denominated A shares traded in Shanghai.

'Since the financial industry is the most representative sector of an economy, the mounting prices of mainland banks are well-grounded,' said Cheng Weiqing, a Citic Securities analyst. 'Investors have reason to grab banking stocks.'

ICBC said early this month that its first-half profit pending official publication grew more than 50 per cent to at least 37.6 billion yuan. The bank's profit for last year was 49.9 billion yuan.

Hong Kong stocks also rose, with the Hang Seng Index closing 0.32 per cent higher at 23,365.56 points, driven up by H shares. The H-share index rose 1.28 per cent to a record 13,320.42 points.

Turnover on the Shanghai and Shenzhen exchanges swelled 47 per cent from Friday to 235.2 billion yuan, the highest this month.

The central government on Friday raised the benchmark one-year deposit and lending rates 27 basis points to cool the economy. The State Council also cut the tax on deposit income to 5 per cent from 20 per cent to make savings deposits more attractive.

'The rate rise and tax cut had a very limited negative impact on the market given that real interest rates are still falling in light of rising inflation,' said Ha Jiming, a China International Capital Corp economist. 'Instead, the moves reduced policy uncertainty in the short run and made the market believe that no substantial adjustment policies are likely to be introduced in the near term.'

Other banks also rose as investors expected lenders to benefit from the widening of net interest margin.

Shenzhen Development Bank closed at 32.95 yuan, up 8.1 per cent, and Bank of China closed at 5.41 yuan, up 2.27 per cent.

'The interest rate rise was expected and investors expected lenders' net interest margin to widen given that the interest rate increase on short-term deposits is less than the lending rate,' Kenny Tang Sing-hing, an associate director at Tung Tai Securities, said.

Some analysts expect mainland banking share prices to continue rising in the lead-up to their earnings results, even though the China Banking Regulatory Commission said the loan growth rate of all banks would likely be less than 15 per cent.

Other analysts said a correction was looming as investors looked to take profits on worries the government would impose more tightening measures to cool the economy, now growing at its fastest in 12 years.

'The wild run in the past two days was a bit excessive,' said Wang Rufu, an analyst at Orient Securities. 'Therefore, a correction is foreseeable in the coming days.'

Brokers said yesterday's A-share rally was also fuelled by rumours that Beijing would soon increase investment by pension funds into stocks. The government allows pension funds to invest no more than 30 per cent of their 230 billion yuan in assets in equities.

Future funds

Talk that Beijing will soon increase pension funds fuelled the rally

ICBC's A shares closed at 5.75 yuan, giving it a market value, in US$, of: $254b