Chief China Strategist
Summary: The Chinese central government, through Central Huijin, increased its holdings in China's top four state-owned banks. The banks involved are the Bank of China, the Agricultural Bank of China, the Industrial and Commercial Bank of China, and the China Construction Bank. Central Huijin's modest yet symbolic investments are very likely aimed at supporting share prices, which has already led to a positive market response. This move, reminiscent of its actions during the 2015 Chinese equity market turmoil, signifies the government's desire to maintain market stability. However, banks’ profitability may suffer from property-related loan losses.
In a noteworthy development on the evening of October 11, China's four largest state-owned banks revealed in their announcements that Central Huijin (“Huijin”) had increased its shareholding in them. These banks include Bank of China (03988:xhkg; 601988:xssc), Agricultural Bank of China (01288:xhkg; 601288:xssc), Industrial and Commercial Bank of China (01398:xhkg; 601398:xssc), and China Construction Bank (00939:xhkg; 601939:xssc). Central Huijin's move signifies its intention to support the Chinese equity market. In this article, we will delve into the implications of this decision and how it has been received in the market.
Central Huijin was established in 2003 to oversee the equity stakes held by the People’s Bank of China (“PBOC”) in major state-owned financial institutions. From 2003 to 2007, Huijin was the primary shareholder in these four major banks, alongside the Ministry of Finance (“MOF”), which held nearly the same amount of shares in two of these banks, namely the Agricultural Bank of China, and the Industrial Commercial Bank of China (“ICBC”). In 2007, when the Ministry of Finance established the China Investment Corporation (“CIC”), it acquired Huijin from the PBOC and injected the acquired shares into CIC, making the MOF the largest and controlling shareholder in all four banks. It's important to note that Huijin operates separately from CIC's investment activities and is directly accountable to the State Council.
The recent purchases made by Central Huijin in these four state-owned banks are relatively modest but symbolically important. The details of these purchases are as follows:
Bank of China Limited (03988:xhkg; 601988:xssc): Huijin increased its holdings to 64.03% from 64.02% with an investment of RMB 94 million and plans to acquire more shares in the secondary market over the next six months.
Agricultural Bank of China Limited (01288:xhkg; 601288:xssc): Central Huijin increased its stake to 40.04% from 40.03% by investing RMB 136 million. It also intends to boost its holdings in the coming six months. It's worth noting that the Ministry of Finance directly holds another 35.29% of this bank.
Industrial and Commercial Bank of China Limited (01398:xhkg; 601398:xssc): With an investment of RMB 130 million, Huijin increased its stake to 34.72% from 34.71%. Similar to the other banks, it plans to acquire more shares in the secondary market in the coming six months. The Ministry of Finance directly holds another 31.14%.
China Construction Bank Corporation (00939:xhkg; 601939:xssc): Central Huijin invested RMB 117 million, raising its stake to 57.12% from 57.11%, with intentions to increase its holdings further in the secondary market over the next six months.
The most recent increase in holdings by Central Huijin within the four major state-owned banks dates back to August 2015, a time of turmoil in the Chinese equity market during the latter half of that year. At that point, Central Huijin invested nearly RMB 20 billion, which is significantly larger compared to the recent announcement of a RMB 477 million investment. However, despite its relatively small size, this latest move carries a message of support for share prices. As a result, it has already led to a more than 1% increase in the Hang Seng Index futures, the Hang Seng China Enterprises Index Futures, and the MSCI China A50 Connect Futures overnight as of the time of writing.
Furthermore, Central Huijin, as stated in the announcements from the four banks, has expressed an intention to continue purchasing more shares over the next six months. This proactive stance is expected to enhance market sentiment in the coming days. Additionally, it's worth noting that Central Huijin holds equity stakes in other listed financial institutions, including China Reinsurance (Group) Corporation (01508:xhkg), Shenwan Hongyuan Group Co., Ltd. (06806:xhkg; 000166:xsec), New China Life Insurance Company Co., Ltd. (01336:xhkg; 601336:xssc), and China International Capital Corporation Limited (03908:xhkg; 601995:xssc).
Nonetheless, it is also important for investors to consider the potential hit to bank profitability in the coming months due to property-related loan losses. The Chinese property sector carries a considerable debt burden, estimated at RMB 60 trillion. Of this total, RMB 40 trillion consists of mortgage debts, which pose relatively lower risks to banks, assuming the completion and delivery of pre-sold units to buyers. Chinese authorities' primary focus is on resolving these pre-sold units to ensure that contractors are paid, and homebuyers receive their properties. The more challenging issue arises from the RMB 20 trillion in property developer debts. It's improbable that China will offer a bailout to insolvent property developers, making it likely that both developers and their banks will incur losses.
Within the RMB 20 trillion in developer-related debts, default rates are anticipated to be higher for senior unsecured bonds and shadow banking lending due to looser covenants and lower-quality collaterals. Bank loans generally have tighter covenants and more robust collateral, albeit relatively speaking. Consequently, credit losses for bonds and shadow banking debts are estimated to range from mid-teens to mid-20%, while loan losses for banks are estimated to be in the mid-single digits. However, banks also have exposure to property developer bonds and the shadow banking sector. As a result, the overall credit loss estimate for the banking sector could surpass RMB 1 trillion. With the Chinese banking system having loans exceeding RMB 200 trillion, even if losses related to the property sector reach as high as RMB 2 trillion (which is not our forecast), it would represent only 1% of the banking system's loan portfolio. This level of exposure appears manageable. While it may not pose solvency risks to the major SOE banks, their profitability could be affected by loan losses, potentially exerting downward pressure on share prices over the medium term.
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