Beijing intervenes to help stabilise banks

Beijing will buy more shares in China’s biggest banks, in an expression of support for the beleaguered stock market and most concrete state action to date to shore up confidence in the slowing economy.

Central Huijin, the domestic arm of China’s sovereign wealth fund, will buy the shares to help stabilise the pillars of the country’s financial system, the official Xinhua news agency said on Monday.

Coming as the Chinese stock market closed at a 30-month low, the move was the strongest sign that Beijing wants to engineer a restoration of confidence in share prices and the economy. It paid instant dividends with a rally in the final minutes of trading on Monday.

Although Chinese growth has so far held up well, the European debt crisis and the risk of a double-dip recession in the US have cast a shadow over the country’s economy. With inflation running near three-year highs and debt levels swollen by heavy spending, economists doubt that Beijing could launch the kind of stimulus it did when the global financial crisis struck in 2008.

Sensing vulnerability, investors have turned against China, driving down commodity prices, betting on the chances of a government default and selling shares in the banks that are the economy’s lifeblood.

The government, through Huijin, is already the majority shareholder in all of the country’s major banks. While the announcement gave no details about how much more it intends to buy, it was unabashed in declaring that it aimed to halt the roughly 30 per cent slide in bank stocks in recent months.

In a rebuff to traders who have been betting that the renminbi will weaken as the Chinese economy slows, Beijing also allowed the currency to record its biggest one-day gain in years on Monday, letting it rise 0.6 per cent against the dollar.

The motivation for that also appeared to be diplomatic, with the US Senate set to vote on Tuesday on legislation that would punish China for keeping its currency undervalued.

Xinhua said the objective of the Huijin move was “to support the healthy operations and development of the key state-owned financial institutions and to stabilise the share prices of state-owned commercial banks”.

It added that Central Huijin would start the purchases “in the coming days”, buying shares in the country’s four largest banks: Industrial and Commercial Bank of China, China Construction Bank, Bank of China and Agricultural Bank of China.

The last time Huijin made such a publicised move was in September 2008, when the outbreak of the global financial crisis had dealt a blow to the Chinese stock market. The Chinese market staged a huge rally after Huijin’s 2008 move, which also paved the way for broader government support for the economy in the form of an Rmb4,000bn ($625bn) stimulus package.

The announcement that Huijin was again wading into the market made an immediate impact. Mainland China’s stock markets were already closed, but Chinese bank shares in Hong Kong turned sharply positive on the news. ICBC, which had been down 3 per cent, rallied at the finish line to close up 1 per cent. Analysts said the sudden turn-around may have partly reflected short covering.

Global investors have soured on Chinese bank shares over the past year, worried that their bad debt levels will soar because of their lending spree since 2008. Shorting Chinese bank shares in Hong Kong has also been a popular play for investors who believe that the world’s fastest-growing major economy is due for a slowdown.

“They [Huijin] are trying to signal to the market that they feel confident,” said Sanjay Jain, a Chinese bank analyst with Credit Suisse. “And of course valuations are depressed, so it’s not a bad idea to buy at these levels for a long-term strategic investor.”