China's slow bank privatisation continues

Open market purchasing of China bank shares by China's sovereign wealth fund marks the latest support from Beijing, which will continue through a looming bad loan crisis.

PUBLISHED : Friday, 12 October, 2012, 1:48pm
UPDATED : Friday, 12 October, 2012, 1:49pm

I've often suggested the controversial idea that Beijing should consider re-privatising its big-four state-owned banks, as all of them still act largely like socialist-era policy lenders rather than the commercial-focused banks they were supposed to become after making IPOs starting in the mid-2000s. So it doesn't come as much of a surprise to me to learn that the central government, which is already the dominant shareholder for each of the banks, has been quietly buying back their shares on the open market to support their stocks as they come under pressure due to a looming bad-loan crisis.

According to media reports, Central Huijin Investment, an arm of China's sovereign wealth fund, has been providing what the China Daily euphemistically calls a "shot in the arm" by purchasing shares in the secondary market of ICBC (1398.HK; Shanghai: 601398), Bank of China (3988.HK; Shanghai: 601988), China Construction Bank (0939.HK; Shanghai: 601939) and Agricultural Bank of China (1288.HK; Shanghai: 601288). More specifically, Huijin announced on its website that it is officially extending an existing share purchase program for the four banks that officially lapsed on Wednesday.

To the best of my knowledge, this kind of open-market share purchasing is often practiced by publicly traded companies themselves to stabilise their share prices, especially when those prices are coming under pressure due to negative market sentiment. But it's far more unusual for a sovereign wealth fund or other big institutional investors to do this kind of gradual purchasing, as such investors usually prefer to buy big stakes in their target companies through a handful of big transactions.

But then again, this is China, where distinctions between the government and publicly listed companies are often quite blurred, especially in a sector like banking where government-controlled entities are the major shareholder of most of the top players. China's banks have been under pressure for much of the last two years, following a Beijing-ordered lending binge in 2009 and 2010 designed to stimulate the Chinese economy at the height of the global financial crisis.

Many of the loans made during that time were made for questionable infrastructure projects to local governments that lacked the financial resources to repay the debt. As a result, many of those loans are starting to sour, forcing Beijing to resort to a number of policy-related and other measures to support the banks and their shares.

Beijing has already quietly boosted its stake in the big lenders by purchasing new shares and bonds that many have been issuing under a string of recapitalisation plans. This kind of open-market share purchasing announced by Huijin is yet another form of low-key support, as it will put yet more shares in the hands of government controlled entities.

As a result, it's not all that surprising to see that Chinese banks shares have actually performed quite well over the last three months and could continue to do so with this kind of strong state support. ICBC and China Construction Bank are both up around 20 per cent over that period, while Bank of China and AgBank are also up a respectable 10 per cent, roughly in line with the broader market's gains.

From an investor's perspective, this kind of support should come as reassurance that bank shares should retain their value and perhaps even post some nice gains over the next year even as bad-loan ratios continue to rise. But from the perspective of anyone looking for true commercial stock plays, these shares don't look all that interesting, as Beijing is likely to consistently meddle in the affairs of major banks for the forseeable future.

Bottom line: Open market purchasing of China bank shares by China's sovereign wealth fund marks the latest support from Beijing, which will continue through a looming bad loan crisis.

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