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China’s largest banks have the country’s sovereign wealth fund to thank for their recent rare boost for their shares. State-owned Central Huijin Investment has increased its stake in the sector. Investors see this move as a sign that authorities are finally starting to support the weak local stock market. But there could be a darker subtext.
Central Huijin has bought about $65mn of shares in the four biggest local banks in which it holds majority stakes: Bank of China, Agricultural Bank of China, China Construction Bank and Industrial and Commercial Bank of China. Central Huijin, a unit of the $1.4tn China’s largest sovereign fund China Investment Corp, plans to increase holdings over the next six months, according to filings.
This is good news for the country’s lenders. Before the property crisis, the largest state-owned banks increased loans to households while cutting back those to companies in order to improve earnings. Without Beijing’s support, the lenders have shouldered most of the burden from the domestic real estate sector’s woes. This includes a mortgage boycott by homeowners and rising bad loans from struggling developers.
An official signal that the banks have Beijing’s support would help investor confidence. But it may also indicate that the full extent of the property crisis has yet to hit.
The last time China’s sovereign wealth fund intervened in the market was eight years ago. This followed the 2015 equity market crash when the Shanghai Composite index fell more than 40 per cent. Reversing declines in the shares of China’s largest banks then was not easy. Declines continued through 2016.
The same may happen. Across China, consumption remains depressed. This weighs on loan growth at lenders. Lenders are exposed to developers that were once seen as financially sound, such as Country Garden Holdings. Analysts expect cumulative non-performing loans to reach as high as 15 per cent of those to developers.
Worse, weakening trends in the quality of bank balance sheets have yet to show the full damage of the unfolding crisis. The sovereign wealth fund also intervened during the 2008 financial crisis. Beijing’s latest move should be interpreted as an early indication that the default levels in the property market pose a clear threat to market stability.
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