This week’s IMF report on risks facing Chinese banks underlines concerns facing China stock investors, but is unlikely to have much effect on stocks prices.
Banks are a pillar of just about any portfolio of China stocks. Long seen as a proxy for strong Chinese economic growth, they are now recommended by numerous brokerages because they are attractively valued and stand to gain from China’s plan to gradually loosen tight credit policies.
But the IMF report on China banks paints a worrying picture. It said the sector faces near-term risks from deteriorating loan quality resulting from loose credit policies during the global financial crisis of 2008 and 2009. Lack of transparency in operations, falling real estate prices and uncertainties from the European debt crisis and other global economic problems are other risks.
The report is not likely to change brokerage recommendations much, however, partly because analysts were already aware of the risks and factored them into their calculations.
“The IMF report has little impact on banks’ share price, many local investors are already expecting this but no one knows the severity,” one experienced Hong Kong-based analyst told Equities in an email. He asked that we not use his name or his company’s name because of the sensitivity of the issue. “In fact, [the] bank sector has outperformed the market by about 3% in the past 3 months.”
That’s not to say the risks aren’t real. The analyst said not only are the IMF’s points valid, but that no one really knows the extent of the problem, not even the Chinese government because banks try to hide their true situation.
He acknowledges that property developers, local governments and some government departments (such as railways) are “loaded with debt.” It is highly unlikely the central government would allow a local government or government department to go bankrupt.
“But things can drag on for a while [and] banks will not book a loss but they will have to cut down their normal lending,” the analyst said.
“In my opinion, the real risk is in the developers and many of them are too highly geared up,” he said. “If the situation implodes, it will be a medium crisis for China, nothing like the Europe’s debt crisis.
“If a sizable developer goes under, I think central government may relax some of the restrictions on property purchase, plus taking over the company to stop a domino effect.”
In other words, there are real risks that investors must weight against the low valuations and good growth prospects for Chinese banks. End
Hong Kong Blue Chips: -143, -0.8%, to 18,817, 11-17-11, Hang Seng Index
Chinese Stocks in Hong Kong: -103, -1.0% to 10,229, 11-17-11, HSCE Index
Shanghai Stocks: -0.2%, 2,463, 11-17-11, Shanghai Composite Index.
Chinese Stocks in the U.S.: -8.2, to 386.2, 11-16-11, Bank of New York Mellon, ADR Index-China
Insight: Hong Kong blue chips tumbled 303 points in early trading to fall below the 50-day moving average, but recovered to post a loss of 143 points. International banks lost ground after the Fitch rating agency said U.S. banks face a risk from the European debt crisis. HSBC (HBC) fell 0.8%.KGI Research
Quotable: “We advise investors to offload some of their holdings, especially sectors and companies with global exposure. Investors could consider players engaged in domestic consumption relatedindustries which should be more resilient amid the volatile market.” BOCOM International. 11-17-11
Chinese Company to Watch: Guangdong Investment (GGDVY) “On top of the water distribution business, its earnings mainstay and cash cow which accounts for three-fifth of the company’s recurring earnings, its various operations will also likely benefit from the burgeoning economic development in Guangdong.” Haitong Securities. 11-16-11
Brokerages and analysts cited have disclaimers on their websites emphasizing their statements are for information only. They do not endorse my blog, and I don’t endorse them.
For a list of Chinese companies sold in the U.S. and information on each company go to http://www.adrbnymellon.com/dr_country_profile.jsp?country=CN