What’s driving the mysterious gains in Chinese banking shares?
Enthusiasm for Chinese financials points to intervention by state authorities
The professional who follows financial markets in China requires an unusual toolkit. Besides econometric knowledge, he or she has to act as a detective, gossip-monger, pop-psychologist and conspiracy theorist.
Just look at the difference between monetary outlooks on the Federal Reserve versus the People’s Bank of China. The Fed watcher’s report will heavily rely on Taylor rules and regression models. It cannot forecast surprises, because the Fed telegraphs its intentions with the same level of earnest detail that a random American, seated next to you on a plane, might provide about his political views, or marriage, or the items in his breakfast sandwich.
In China, however, surprises occur all the time. Two weeks ago, for instance, there was an unexpected liquidity squeeze in the interbank market, forcing market watchers into Freudian analysis mode. The PBOC is clearly mad about something – but what? It’s like trying to figure out why an uncommunicative spouse has gone frosty. The trick is to review all recent sins, and through a process of deduction identify the likely target of the PBOC’s ire.
Could it be loose lending in the mortgage market? A surge of wealth management product (WMP) sales in the shadow banking market? Or is the PBOC taking revenge on those who may be gaming the bond market, piling into risky high-yield debt on the assumption that governments will bail out, rather than allow defaults ahead of upcoming National People’s Congress?
One can only speculate. In writing about the squeeze, BOC International used the word “rumour” five times in its report. For example in this sentence: “The unclear signal from the central bank without communication to the market caused rumours and then significant increase in interest rates in the market.”
Rates calmed when vice governor Yi Gang reassured the markets that liquidity would remain ample. But really, can Yi be trusted?
Strategists at both Bank of America Merrill Lynch and Credit Suisse expect further tightening ahead. Merrill’s chief concern is the bubbly sales in WMPs, or financial vehicles structured and managed by banks, that usually promise to deliver superior returns to bank deposits. A crackdown in this sector will likely have a broader tightening effect, in Merrill’s view. WMPs are the biggest funding sources in the shadow-banking world, and as such, “any significant slow-down in [their] sales may have important implications on asset prices across the board, especially bonds and stocks, and possibly properties.”
Credit Suisse also expects Beijing will continue to tighten monetary conditions, but try to offset the pressure by allowing for further currency devaluation. This is a hard call to make elsewhere in the world, because tighter monetary policy usually boosts a currency. But this is China, where analysts must consider the impact of the heavy-hand of the state on asset prices.
Which brings us to another market mystery – the run-up of the price of Chinese banks listed in Hong Kong.
Since May, there has been a torrent of flows out of China, through a bilateral trading platform, and into H-shares in Hong Kong, particularly the banks. ICBC alone is up some 30 per cent since May. This burst of enthusiasm for the financials is puzzling, or to put it another way, downright suspicious.
“It is unrealistic to imagine that mainland retail investors are behind these flows,” Gavekal Dragonomics said in a report on Friday. “Such heavily concentrated buying smacks of China’s ‘national team’, the group of state funds headed by China Securities Finance Corporation and Central Huijin Investment, which last year weighed in to support the collapsing mainland A-share markets.”
Why would Beijing be boosting the H-share banks? Gavekal strategist Chen Long imagines two motivations: one is that by closing the valuation gaps with H-shares, Beijing will attract more foreign investors to its A-share market. The other possibility is that China wants to increase the value of the banks’ shares ahead of fundraising to shore up capital. After all, there is a prohibition against selling stakes in state-owned companies below book value, a level at which many banks have been trading.
In other markets, engaging in such speculation would require a tinfoil hat, and elicit jokes about CIA chips planted in the teeth. In China, such speculation is not only rational, but necessary.
Cathy Holcombe is a Hong Kong based financial writer
(Story amended to remove errant word “book” in final paragraph.)