Bloomberg News

China’s Stocks Rise After Sovereign Wealth Unit Buys Bank Shares

October 11, 2011

Oct. 11 (Bloomberg) -- China’s stocks rose for the first time in five days as a state-run investment arm began buying shares of the nation’s four biggest banks after valuations dropped to levels reached during the global financial crisis.

Industrial & Commercial Bank of China Ltd. climbed the most in six weeks while China Construction Bank Corp., Agricultural Bank of China Ltd. and Bank of China Ltd. jumped at least 2 percent after Central Huijin Investment Ltd. acquired their shares. China Shenhua Energy Co. and Yanzhou Coal Mining Co. plunged more than 4 percent, capping the stock market’s gains, after the government announced higher taxes on coking coal.

“Central Huijin’s move shows the government’s intention to save the market, which is close to a bottom,” said Yang Delong, a fund manager at China Southern Fund Management Co., which oversees $21 billion. “This will help boost companies with record low valuations such as banks and automakers in the short term.”

The Shanghai Composite Index added 3.7 points, or 0.2 percent, to 2,348.52 at the close. The measure rallied as much as 2.9 percent today, rebounding from a drop yesterday that sent it to the lowest level since March 25, 2009. The CSI 300 Index lost 0.2 percent to 2,551.99 today.

The Shanghai Composite has tumbled 16 percent this year as the government raised interest rates and reserve-requirement ratios for banks to cool inflation that’s at the highest level in almost three years. The stock measure is valued at 10.84 times estimated profit, compared with the record low of 10.82 times set yesterday, according to data compiled by Bloomberg.

‘Some Relief’

A gauge of financial companies in the CSI 300 Index rose 1.3 percent, the most among the 10 industry groups. ICBC, the world’s largest bank by market value, added 1.5 percent to 4.05 yuan, the most since Aug. 25. China Construction Bank gained 2.5 percent to 4.52 yuan. Agricultural Bank advanced 2 percent to 2.52 yuan. Bank of China increased 2.1 percent to 2.93 yuan.

Central Huijin will continue with “related market operations,” the unit of China’s sovereign wealth fund said, without providing details on how much it will invest and whether it will buy the shares in Hong Kong or Shanghai.

Central Huijin bought 14.6 million Shanghai-listed A shares in ICBC, 7.38 million yuan-denominated shares of Construction Bank, 39.1 million shares in Agricultural Bank and 3.5 million shares in Bank of China, the four lenders said in separate statements to the Hong Kong and Shanghai stock exchanges.

The bank share buying will bolster the stock market, according to China International Capital Corp.

Financials’ Performance

“We should expect at least some relief on selling pressure from this move by Huijin, if history is a guide,” Hao Hong, a Beijing-based global equity strategist, said in a report to clients.

The Shanghai Composite jumped 21 percent in a week after the government said it would buy shares of the three largest lenders on Sept. 18, 2008, according to data compiled by Bloomberg. In the aftermath of the collapse of Lehman Brothers Holdings Inc., the government also cut interest rates for the first time in six years, allowed most banks to set aside smaller reserves and scrapped a tax on equity purchases.

The CSI 300 Financials Index has fallen 15 percent this year on speculation that some of the $3.5 trillion in new loans made since the end of 2008 may sour as the world’s fastest- growing economy slows. ICBC has dropped 4.5 percent in 2011, extending last year’s 21 percent slide. The stock trades at 6.83 times estimated earnings, compared with the record low of 6.67 times set on Sept. 26, according to data compiled by Bloomberg.

More Support Needed

“For the longer term, the move isn’t enough to turn the pessimistic sentiment around and the bottom may be 2,000 points,” said China Southern Fund’s Yang. “If history is any guide, a turnaround or rally in the market will need stimulus from all government agencies like the central bank and the China Securities Regulatory Commission.”

China’s stocks have fallen this year amid concern the European debt crisis is worsening and the Chinese government will keep its tight monetary policies to tame inflation and curb asset bubbles. Lending restrictions have hurt small companies in Wenzhou, a city in the eastern province of Zhejiang.

The worst of the “panic and hysteria” over informal lending in China may be over as Wenzhou works with businesses and the central government to stabilize credit, UBS AG said. Wenzhou accounts for less than 1 percent of national gross domestic product, but reportedly has more than 400,000 mostly small firms, UBS said.

“The size of informal lending is relatively small and the concerns about the direct impact on the formal banking sector and the economy are exaggerated,” Hong Kong-based economist Wang Tao said in a note today. The “bigger risks are credit withdrawal in both the formal and informal lending market and contagion,” she said.

Coal Producers

China Shenhua, the listed unit of China’s biggest coal producer, fell 4.2 percent to 24.21 yuan, the most since Aug. 18. Yanzhou Coal dropped 4.9 percent to 27.83 yuan, its biggest loss since Aug. 8. Yangquan Coal Industry Group Co. plunged 9.3 percent to 21.79 yuan.

On a volume basis, China will levy a tax of 8 yuan to 20 yuan on every metric ton of coking coal sold starting next month , the government said on its website. The tax on coking coal is 8 yuan a ton currently, according to Anna Yu, a Hong Kong based energy analyst with ICBC International Research Ltd.

Emerging-market stocks are “cheap” and Pacific Investment Management Co. is buying in China after the nation’s shares tumbled this year, Maria Gordon, an emerging-market equity-fund manager at Pimco, said in an interview yesterday.

“Markets are cheap,” Gordon said. Still, “it’s very difficult to call the bottom” given concerns that the global economy is slowing, she said.

--Irene Shen. Editors: Allen Wan, Richard Frost

To contact the reporter on this story: Irene Shen in Shanghai at ishen4@bloomberg.net

To contact the editor responsible for this story: Shiyin Chen at schen37@bloomberg.net


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