China's Cautious Bank Acquisitions Emit Rescue Signals

15 Oct, 2023

China's Cautious Bank Acquisitions Emit Rescue Signals

China is taking action in response to concerns about its equity markets, which have been affected by capital outflows. Economists and investment managers had urged Beijing to purchase stocks directly to support the markets. Central Huijin Investment, a state fund, partially addressed this call on Wednesday evening, although not in the way many had hoped.

The state fund increased its controlling interests in China's Big Four banks by a small margin, investing 477 million yuan ($65 million) in the Industrial and Commercial Bank of China, Construction Bank, Bank of China, and Agricultural Bank of China. While this amount may appear modest, Central Huijin has announced plans to continue adding to its holdings, which are already valued at 2.5 trillion yuan, over the next six months.

This move does not resemble the dream stabilization fund. Comparatively, it pales compared to Beijing's 2015 efforts to prevent a market meltdown. During that crisis, the state fund spent around 20 billion yuan (approximately $3 billion at current exchange rates) to acquire banking shares from other state entities, freeing up capital for them to purchase billions of mainland-traded shares. However, this intervention ultimately failed to improve market sentiment, especially among foreign investors, and was followed by a record $725 billion in net capital outflows in 2016, according to the Institute of International Finance. Central Huijin has also been less active in the stock market compared to its frequent stake increases in the banks between 2008 and 2013.

Nonetheless, the market responded positively, with the Big Four banks seeing gains of up to 6% in Hong Kong on Thursday. Chinese banks have been bracing for the impact of unresolved debt issues in the property sector and local government financing entities, which pose a systemic financial risk to the world's second-largest economy. This is one reason Chinese banks currently trade at an average of barely half of their book value, compared to values exceeding par prior to 2015 when there was also a housing crisis.

Beijing's recent cautious approach seems designed not to alarm the market as it did in the past. It may signal the beginning of a more prudent strategy if banks start to appropriately acknowledge non-performing loans and require recapitalization. Addressing this issue would be the logical and sensible endpoint of President Xi Jinping's deleveraging campaign. By helping these institutions attain a healthier value, the government could ultimately reduce its own financial burdens.