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Business Tianjin Magazine - Business English Magazine in China
Chinese stocks hit by capital concerns
Wednesday, 25 November 2009 16:23
Chinese stocks fell their furthest in almost three months on Tuesday as investors took profits amid fears that banks would be forced to sell shares to raise capital.
The rumour preceded reports China’s 11 largest listed banks will have to raise at least Rmb300bn ($43bn) to meet more stringent capital adequacy requirements and maintain loan growth and business expansion, according to estimates from BNP Paribas.
China’s banking regulator has asked big banks to formulate plans to replenish capital ratios, a move that has sparked concern that banks will liquidate some of their stock holdings.
The Shanghai Composite dropped 3.5 per cent to 3,223.526, having gained more than 11 per cent this month.
Although details of capital raising plans remained unclear, the news triggered rampant market speculation and triggered a bout of profit taking as investors moved to lock in recent sharp gains, said market participants.
“Some people want to sell their shares simply because they’ve gained a lot and they want to lock in profits,” said Peng Yunliang of Shanghai Securities.
The Shanghai Composite, which hit a three-month high on Monday, is up 77 per cent this year.
“People are also worried that [loose] monetary policy will turn round”, he added, although his own view was that these fears were overblown.
Bank lending in China has surged this year and analysts believe that some of the credit expansion has found its way into mainland stock markets, driving them higher.
Bank of China, which is listed in Hong Kong, was the biggest faller on the territory’s stock exchange, losing 4 per cent, while China Construction Bank was the second -biggest faller, slipping 3.4 per cent.
The biggest share slides on Tuesday were found in Shanghai’s volatile dollar-denominated B-share index, which slid 7.3 per cent to 242.025.
The index had gained 25.6 per cent since the start of the month, partly fuelled by rumours that B shares will soon be merged with the A share index or the upcoming international board in Shanghai. Such rumours have been around for years and periodically resurface.
Banking regulator gets tough on capital rules
Tuesday, 24 November 2009 16:20
SHANGHAI—China's banking regulator issued a stern warning to banks to strictly comply with capital requirements or face sanctions, the clearest sign yet Beijing is worried about possible risks building in the country's financial system after a year of blow-out lending.
Banks that fail to comply by the end of the year with capital adequacy requirements—the amount of capital they must hold against their loans—could be punished with limits on market access, overseas investments and new branches, the China Banking Regulatory Commission said in a statement on its Web site. Such sanctions already exist, but have rarely been enforced.
New loans in the first half of this year totaled 7.37 trillion yuan ($1.079 trillion), equivalent to half of the country's gross domestic product over the period, as the government turned to bank lending to power its economic stimulus plans.
There are fears that the lending binge could saddle banks with large amounts of non-performing loans, reversing some of the gains achieved over the past decade of financial reforms that were aimed at turning China's state banks into commercial lenders better able to manage risk.
The tough statement indicates that Beijing is ready to more actively tighten the credit growth that has been the linchpin of China's economic recovery. Higher capital requirements act as a constraint on lending, as banks would need to raise additional money before they could make more loans.
The capital adequacy requirement was raised to 10% from 8% at the end of last year. At the same time, banks were ordered to set aside credit provisions equivalent to at least 150% of their bad loans. More recently, the CBRC reduced the amount of subordinated bonds—debt that has a lower priority than other claims on an asset, and has higher returns— that banks could count toward their capital requirements. This was after it became apparent that banks were using the debt to lend money to each other, raising the risk that a default could ripple through the entire system.
A spokesman for China Construction Bank Corp, one of the Big Four state lenders, said the banking regulator "is considering imposing stricter capital requirements for lenders" next year, and the bank is closely monitoring the situation. Hu Changmiao said his bank "isn't yet sure" whether the CBRC will decide to raise its capital requirement and if so, by how much, because the regulator "hasn't issued any written notices."
A CBRC spokesman said there "won't be any sudden changes" in banks' capital requirements. He denied a media report saying the regulator will require major state-owned banks to have a capital adequacy ratio of 13% from next year.
The spokesman said capital ratios are decided in a "counter-cyclical" way to address "systemic risks," language that indicates Beijing sees these regulatory requirements as one way to cool down a lending boom if it threatens economic stability.
In the past, Chinese authorities have curbed overheated lending by imposing sweeping credit quotas. This time, they appear to be adopting a more market-oriented approach, while being prepared to use ad hoc administrative measures as necessary.
Last week, the regulator issued verbal instructions to a mid-sized Chinese state lender that it must limit outstanding loans for the last two months of the year to its level at the end of October, according to an internal bank memo shown to Dow Jones Newswires by a bank executive on the condition that his employer not be identified. The regulator denied issuing such a notice.
No other banks seem to have been similar instructed. But medium-sized banks in particular have had trouble maintaining their required capital levels and loan-to-deposit limits, having been especially aggressive in using the stimulus boost to grant more loans and expand their market share. Beijing may be tempted to again directly cap some of their lending limits rather than hope they will adjust their loan portfolio to meet the requirements.
In its statement on Monday, the CBRC said it doesn't plan to impose any controls on the size of bank loans. It also said it aims to promote a stable and continued growth in bank lending, and prevent "big swings" in lending.
Lending curbs were last imposed at the end of 2007 to cool an overheating economy, and were lifted in October 2008 with the onset of the global financial crisis.
There is little likelihood that loan limits might be rolled out to the entire banking system. Although China is growing faster than any major economy, a sudden pullback in bank lending could shake the country's recovery.
A greater concern for Beijing is likely to be the fallout in two or three years if banks discover that many of their loans won't be repaid. China's last efforts to rid the financial system of non-performing loans five years ago cost the country hundreds of billions of dollars, and the experience is still fresh in regulators' minds.
Bank lending has slowed somewhat over the last month, with banks extending 253 billion yuan of new yuan loans in October, the lowest level so far this year and less than half of September's amount.
Fitch Ratings analyst Wen Chunling says the banking regulator faces a dilemma. "On the one hand it wants to alert banks over risks. But on the other hand it wants to avoid scaring people with too strong alerts," she said.
China growth faces currency dilemma-thinktank economist
Monday, 23 November 2009 15:59
BEIJING, Nov 22 (Reuters) - International pressure on China to lift the value of its yuan against the dollar could stoke risks to growth in 2010, an economist at a top state thinktank has said, warning of a deepening dilemma facing currency policy.
Yu Bin, head of macro-economic research at the State Council Development Research Center, told a meeting in Beijing the nation could enjoy annual growth of over 8.5 percent next year, but currency pressures, falling consumer demand and other worries could erode that growth, the Hong Kong-based Wen Wei Po newspaper reported on Sunday (www.paper.wenweipo.com).
Yu's warning of a currency "dilemma" confronting Chinese policy-makers underscored the tricky choices they face in navigating between foreign calls to let the yuan rise against the dollar and domestic fears that such a move could pummel exporters and drag down growth.
China allowed the yuan to rise 21 percent against the dollar between July 2005 and July 2008 before effectively repegging the yuan to help its exporters cope with a slump in global demand.
Beijing now faces mounting international calls to let the yuan, or "renminbi", rise on the grounds that it is undervalued and stoking imbalances with other big economies, but it showed no public sign of budging during last week's visit by U.S. President Barack Obama.
Yu told the meeting on Saturday that the Chinese economy faced risks if the dollar continues to depreciate against other major currencies, and from pressure to let the yuan rise in value against the dollar.
"China is stuck in a dilemma," he said, according to the paper.
The weakening of the dollar could mean China pays relatively more for bulk commodities, said Yu, whose thinktank advises the State Council, or central government cabinet. Those commodities, such as oil and ore, are crucial ingredients for Chinese growth.
"With the depreciation of the dollar, maintaining stability of the renminbi exchange rate against the dollar will make the renminbi appreciate against the yen and euro, fanning trade friction and increasing pressure for appreciation of the renminbi," the report cited Yu as saying.
"If the renminbi appreciates too quickly, this will be a blow to China's huge export-driven industries, while a small appreciation will draw more capital into China speculating on the renminbi exchange rate, creating instability in financial markets", added Yu.
The Wen Wei Po is a Chinese-language newspaper under mainland control.
China's central bank recently tweaked its description of how it manages the currency, setting off speculation it might give the yuan more room to move.
But market expectations of appreciation have remained muted and Chinese officials and state-run newspapers have forthrightly rejected calls for a rapid shift.
China may need to slow credit growth to stem bubbles, OECD says
Friday, 20 November 2009 15:33
Nov. 20 (Bloomberg) -- China may need to rein in credit growth to tame inflationary pressures and keep asset bubbles from emerging as growth accelerates, the Organization for Economic Cooperation and Development said.
The world’s third-largest economy is expected to expand 8.3 percent this year, faster than a June estimate of 7.7 percent, the Paris-based group said in a report yesterday. Gross domestic product growth will climb to 10.2 percent in 2010, it predicted.
China’s government has encouraged a $1.3 trillion credit boom this year to complement its monetary and fiscal stimulus, helping propel the economy to its fastest pace of growth in a year last quarter. The credit expansion has pushed house prices to their biggest gains in more than a year and aided an 82 percent climb in the Shanghai Composite Index of stocks.
“The principal upside risk to the projections is that the money and credit expansion in 2009 will give a bigger-than- expected boost to demand, especially in the real-estate sector, the OECD said. “Credit conditions may need to be tightened to prevent the emergence of inflationary pressures and asset bubbles” should that happen.
China is among the emerging markets facing risks of property and commodity market bubbles, central bank adviser Fan Gang said yesterday, joining officials from the region in expressing concern about surging asset prices.
Asian economies from Hong Kong to Singapore are fighting rising property values, which threaten to mimic the U.S. mortgage bubble that roiled the world economy. House prices in 70 major Chinese cities rose 3.9 percent in October from a year earlier, the government said Nov. 10.
‘Abnormal’ Prices
Rising residential prices are “abnormal,” Dong Zuoji, director of land planning at China’s land ministry, said last week. The central bank and banking regulator may “soon” issue measures to limit the use of debt in real-estate purchases to rein in price gains, a Shanghai official said this month.
The surge in credit growth may increase risks in the nation’s banking system, the OECD said yesterday. The China Banking Regulatory Commission on Oct. 16 told the nation’s five largest lenders to increase write-offs against bad loans and make sure their capital ratios don’t weaken.
“Banks have not so far reported significant stress, but the surge in lending in the first half of the year may imply a risk of future bad loans, as has been the case in the wake of earlier lending booms,” according to the report.
Fixed Currency
China’s decision to fix its yuan to the dollar since July 2008 may increase inflationary pressures and boost its external surplus should the U.S. currency continue to depreciate, the OECD said. It has kept its exchange rate at about 6.83 per dollar since July 2008.
The economy grew 8.9 percent in the third quarter from a year earlier, and the median projection of economists surveyed by Bloomberg News is for GDP to jump more than 10 percent in the final three months of 2009.
China may see an expansion of between 8 percent and 9 percent next year, Fan, the academic member of the central bank’s monetary policy committee, said in Hong Kong on Nov. 18, adding that a “double-digit” economic growth rate wouldn’t be good for the country.
President Hu Jintao last week said the country will take “vigorous” steps to boost domestic demand and reduce its reliance on investment and exports for economic growth.
China’s overseas shipments won’t regain their pre-crisis growth rates even as the world economy recovers, the OECD said. That may narrow the current account surplus to about 5.4 percent of GDP in 2010, from 6.4 percent this year, it predicts.
The government’s 4 trillion yuan ($586 billion) stimulus plan has boosted investment and helped minimize job losses in the world’s most populous nation.
China can afford to keep spending at “higher levels” to spur domestic demand as the effects of its stimulus package wanes in 2011, the OECD said. Economic growth may slow to 9.3 percent in 2011, it predicts.
“The composition of public spending ought to be changed to favor outlays on social services, notably education, health and pensions,” according to the report.
China Minsheng Bank raises 3.9b USD in HK IPO
Thursday, 19 November 2009 16:24
HONG KONG, Nov 19 (Reuters) - China Minsheng Banking Corp, the country's seventh-largest listed bank, raised US$3.9 billion when it priced its Hong Kong initial public offering around the mid-point of its indicated range, sources familiar with the deal said on Thursday.
Minsheng Bank is the seventh mainland bank to be listed in Hong Kong and is expected to be the fifth-largest IPO in the world so far this year.
Minsheng, which is already listed in Shanghai, sold 3.32 billion shares, or 15 percent of its enlarged share capital, at HK$9.08 ($1.17) each, compared with a range of HK$8.50 to HK$9.50, the sources said.
If the lender exercises a 15 percent overallotment option, which many in the market expect, the size of its Hong Kong listing would increase to $4.5 billion.
Its shares ended Wednesday trade in Shanghai at 8.48 yuan, down 0.7 percent.
At the offering price, Minsheng Bank is valued at 1.7 times 2010 post-shoe basis book value estimated by joint bookrunners.
By comparison, Bank of Communications, China's No. 5 lender, traded at about 2.17 times 2010 book value, while China Merchant Bank and CITIC Bank traded at 2.75 times and 1.66 times book value, respectively, according to a UBS research report.
Minsheng's IPO, which came after at least two previous failed attempts in the past few years due to poor market conditions, has seen many tycoons and big funds subscribe as investors scramble to tap China's surging economy and massive emerging consumer sector.
The Hong Kong retail tranche was about 160 times oversubscribed, one of the sources close to the deal said. The popularity will trigger the clawback option, raising the retail portion to 20 percent from 5 percent of total offering.
China-focused private equity fund Hopu Investment Management plans to invest up to $1 billion in Minsheng. Billionaire investor George Soros, Tiger Fund, Temasek, China Life Insurance and China Pacific Insurance Group have committed to buy Minsheng's shares from the institutional portion of its IPO, sources said earlier.
The lender has also pledged five cornerstone investors, including Chinese Estates Holdings Ltd, China Overseas Finance Investment Ltd and Ping An of China Asset Management (Hong Kong) for a combined $340 million worth of shares, with a commitment not to sell their investments for six months.
Minsheng's trading debut is set for Nov 26, under the symbol '1988'.
The mid-sized lender forecasts 2009 net earnings will jump at least 39 percent to 11 billion yuan ($1.61 billion).
Minsheng has recognized an about 93 percent loss on an 887 million yuan investment for a 9.9 percent stake in UCBH Holdings Inc.
UBS, BOC International, China International Capital (CICC), Macquarie and Haitong Securities are handling Minsheng's deal.
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