China/Hong Kong Market Pulse: Central Huijin Increases Stakes in the Four Largest SOE Banks

Macro 5 minutes to read
Redmond Wong

Chief China Strategist

Summary:  The Chinese central government, through Central Huijin, increased its holdings in China's top four state-owned banks. The banks involved are the Bank of China, the Agricultural Bank of China, the Industrial and Commercial Bank of China, and the China Construction Bank. Central Huijin's modest yet symbolic investments are very likely aimed at supporting share prices, which has already led to a positive market response. This move, reminiscent of its actions during the 2015 Chinese equity market turmoil, signifies the government's desire to maintain market stability. However, banks’ profitability may suffer from property-related loan losses.


Key Points:

  • Central Huijin increases stakes in China's top four state-owned banks.
  • Modest investments carry significant symbolic support for share prices and market confidence.
  • Reflects government commitment to market stability and confidence, akin to 2015 crisis actions.
  • Positive market response, with over 1% rise in key futures indices.
  • Risks to consider: the property sector impacting bank profitability

Introduction

In a noteworthy development on the evening of October 11, China's four largest state-owned banks revealed in their announcements that Central Huijin (“Huijin”) had increased its shareholding in them. These banks include Bank of China (03988:xhkg; 601988:xssc), Agricultural Bank of China (01288:xhkg; 601288:xssc), Industrial and Commercial Bank of China (01398:xhkg; 601398:xssc), and China Construction Bank (00939:xhkg; 601939:xssc). Central Huijin's move signifies its intention to support the Chinese equity market. In this article, we will delve into the implications of this decision and how it has been received in the market.

Central Huijin's Role and Historical Context

Central Huijin was established in 2003 to oversee the equity stakes held by the People’s Bank of China (“PBOC”) in major state-owned financial institutions. From 2003 to 2007, Huijin was the primary shareholder in these four major banks, alongside the Ministry of Finance (“MOF”), which held nearly the same amount of shares in two of these banks, namely the Agricultural Bank of China, and the Industrial Commercial Bank of China (“ICBC”). In 2007, when the Ministry of Finance established the China Investment Corporation (“CIC”), it acquired Huijin from the PBOC and injected the acquired shares into CIC, making the MOF the largest and controlling shareholder in all four banks. It's important to note that Huijin operates separately from CIC's investment activities and is directly accountable to the State Council.

Central Huijin's Recent Purchases

The recent purchases made by Central Huijin in these four state-owned banks are relatively modest but symbolically important. The details of these purchases are as follows:

Bank of China Limited (03988:xhkg; 601988:xssc): Huijin increased its holdings to 64.03% from 64.02% with an investment of RMB 94 million and plans to acquire more shares in the secondary market over the next six months.

Agricultural Bank of China Limited (01288:xhkg; 601288:xssc): Central Huijin increased its stake to 40.04% from 40.03% by investing RMB 136 million. It also intends to boost its holdings in the coming six months. It's worth noting that the Ministry of Finance directly holds another 35.29% of this bank.

Industrial and Commercial Bank of China Limited (01398:xhkg; 601398:xssc): With an investment of RMB 130 million, Huijin increased its stake to 34.72% from 34.71%. Similar to the other banks, it plans to acquire more shares in the secondary market in the coming six months. The Ministry of Finance directly holds another 31.14%.

China Construction Bank Corporation (00939:xhkg; 601939:xssc): Central Huijin invested RMB 117 million, raising its stake to 57.12% from 57.11%, with intentions to increase its holdings further in the secondary market over the next six months.

The Implications: A Short-Term Boost in Sentiment

The most recent increase in holdings by Central Huijin within the four major state-owned banks dates back to August 2015, a time of turmoil in the Chinese equity market during the latter half of that year. At that point, Central Huijin invested nearly RMB 20 billion, which is significantly larger compared to the recent announcement of a RMB 477 million investment. However, despite its relatively small size, this latest move carries a message of support for share prices. As a result, it has already led to a more than 1% increase in the Hang Seng Index futures, the Hang Seng China Enterprises Index Futures, and the MSCI China A50 Connect Futures overnight as of the time of writing.

Furthermore, Central Huijin, as stated in the announcements from the four banks, has expressed an intention to continue purchasing more shares over the next six months. This proactive stance is expected to enhance market sentiment in the coming days. Additionally, it's worth noting that Central Huijin holds equity stakes in other listed financial institutions, including China Reinsurance (Group) Corporation (01508:xhkg), Shenwan Hongyuan Group Co., Ltd. (06806:xhkg; 000166:xsec), New China Life Insurance Company Co., Ltd. (01336:xhkg; 601336:xssc), and China International Capital Corporation Limited (03908:xhkg; 601995:xssc).

Property Sector Debts Impacting Bank Profitability

Nonetheless, it is also important for investors to consider the potential hit to bank profitability in the coming months due to property-related loan losses. The Chinese property sector carries a considerable debt burden, estimated at RMB 60 trillion. Of this total, RMB 40 trillion consists of mortgage debts, which pose relatively lower risks to banks, assuming the completion and delivery of pre-sold units to buyers. Chinese authorities' primary focus is on resolving these pre-sold units to ensure that contractors are paid, and homebuyers receive their properties. The more challenging issue arises from the RMB 20 trillion in property developer debts. It's improbable that China will offer a bailout to insolvent property developers, making it likely that both developers and their banks will incur losses.

Within the RMB 20 trillion in developer-related debts, default rates are anticipated to be higher for senior unsecured bonds and shadow banking lending due to looser covenants and lower-quality collaterals. Bank loans generally have tighter covenants and more robust collateral, albeit relatively speaking. Consequently, credit losses for bonds and shadow banking debts are estimated to range from mid-teens to mid-20%, while loan losses for banks are estimated to be in the mid-single digits. However, banks also have exposure to property developer bonds and the shadow banking sector. As a result, the overall credit loss estimate for the banking sector could surpass RMB 1 trillion. With the Chinese banking system having loans exceeding RMB 200 trillion, even if losses related to the property sector reach as high as RMB 2 trillion (which is not our forecast), it would represent only 1% of the banking system's loan portfolio. This level of exposure appears manageable. While it may not pose solvency risks to the major SOE banks, their profitability could be affected by loan losses, potentially exerting downward pressure on share prices over the medium term.


Quarterly Outlook 2024 Q3

Sandcastle economics

01 / 05

  • Macro: Sandcastle economics

    Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.

    Read article
  • Bonds: What to do until inflation stabilises

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain inflation and evolving monetary policies.

    Read article
  • Equities: Are we blowing bubbles again

    Explore key trends and opportunities in European equities and electrification theme as market dynamics echo 2021's rally.

    Read article
  • FX: Risk-on currencies to surge against havens

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperform in Q3 2024.

    Read article
  • Commodities: Energy and grains in focus as metals pause

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities in Q3 2024.

    Read article
Disclaimer

Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000
Australia

Contact Saxo

Select region

Australia
Australia

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide, Product Disclosure Statement and Target Market Determination to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation. The Target Market Determination should assist you in determining whether any of the products or services we offer are likely to be consistent with your objectives, financial situation and needs.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.

Please click here to view our full disclaimer.