GO
Loading...

China's Move to Prop Up Bank Shares Will Not Change Sentiment: Analysts

Monday, 24 Oct 2011 | 7:26 PM ET

Shares of China's "big four" banks rose sharply on Tuesday after a unit of the country's $400 billion sovereign wealth fund — Central Huijin Investment — increased its stake in the lenders.However, analysts tell CNBC that while the intervention to boost investor confidence in China's financial system is encouraging, the move will not change market sentiment.

A branch of the Agricultural Bank of China, the third-largest bank in the country by assets and the fourth-largest by market cap. China's new stress tests are aimed at ensuring banks have enough capital in the eventuality of a property market correction.
AFP | Getty Images
A branch of the Agricultural Bank of China, the third-largest bank in the country by assets and the fourth-largest by market cap. China's new stress tests are aimed at ensuring banks have enough capital in the eventuality of a property market correction.

Joseph Lau, Senior Asia Economist at Societe Generale, says Huijin's buying of bank shares needs to be part of a bigger stimulus package for it to work and Chinese bank shares will continue to see further downside.

"It's probably not going to be sufficient," says Lau, adding that the scale and severity of the problem facing China's financial system plus the belief that the banks' share prices have not yet hit bottom, will reduce the impact of Huijin's move.

On Monday, Huijin added to its existing holdings in the big four banks by buying nearly 37 million shares in Agricultural Bank of China , 25.6 million shares in the Industrial and Commercial Bank of China , nearly 14 million shares in China Construction Bank and 9.9 million shares in the Bank of China .

According to Jim Antos, bank analyst at Mizuho Securities Asia, Huijin has spent $31 million to buy shares in the four banks, which he considers "chicken feed."

"The action is more important symbolically or as a signal, than as a financial event," Antos says.

However, he adds that it makes sense for Huijin to buy the bank shares at current lows, since it has a long-term perspective. The big four banks have fallen between 11 and 14 percent on the Shanghai Stock Exchange over the past six months.

Jesper Madsen, Portfolio Manager at Matthews Asia, views Huijin's move as an attempt to help these banks access more capital. There have been concerns, he says, that China banks have extended their balance sheets to support local governments and now they need more money.

"The debt and non-performing loans [of these banks] are probably higher than what's being reported right now," Madsen says.

"The fact is there are some big numbers floating around out there, and as a result these banks do need access to capital and the move we're seeing right now is to shore up those share prices so they can actually come to the market."