Chinese Banks Rally After Huijin Begins Increasing Holdings
Comment of the Day

October 11 2011

Commentary by Eoin Treacy

Chinese Banks Rally After Huijin Begins Increasing Holdings

This article by Stephanie Tong for Bloomberg may be of interest to subscribers. Here is a section:
Last month's announcement that Warren Buffett's Berkshire Hathaway Inc. would repurchase stock for the first time in four decades was very different from what Huijin is doing, said Vitaliy Katsenelson, chief investment officer at Denver-based Investment Management Associates, which manages $60 million.

"China's sovereign wealth fund is not Warren Buffett," said Katsenelson, who said his long-only fund has avoided investments that have any exposure to China. "When Warren Buffett says he's buying Berkshire Hathaway, he actually thinks it's undervalued. China says that, but it doesn't necessarily mean that, they're just trying to create confidence."

While the purchases didn't significantly increase Huijin's holdings of 35.4 percent in ICBC, 57.1 percent in Construction Bank, 40 percent in Agricultural Bank and 67.6 percent in Bank of China, the fund plans to make further acquisitions over the next 12 months, the lenders said.

Huijin sold 40 billion yuan of bonds in August as it increased investment in banks, according to the website of Chinabond, the official bond clearing house. The Beijing-based investment company, set up in 2003, became a subsidiary of CIC in 2007 when the sovereign wealth fund was established.

Eoin Treacy's view A subscriber kindly forwarded this informative academic report dated October 2006 which deals with how and why the Chinese banks were bailed out five years ago. It is instructive reading since a number of the issues that allowed nonperforming loans to become such a problem last time are still relevant today.

The banking sector has been the focus of government attempts to sanitise the 2009 stimulus package and to curtail speculation in the property market. Share prices have suffered over the last year as repeated reserve hikes weighed on investor sentiment.

China's A-share market is heavily influenced by central government policy. Sectors with the largest weighting Financials (34.1%), Industrial (17.6%) Materials (13.9%) and Energy (8.54%) are central to the investment led economic growth upon which the country depends.

In 2005, the Chinese stock market had been the worst performer, globally, for more than a year. The government announced it was going to support the stock market and followed through with large purchases. This was a green light for investors who pushed the Index to an impressive peak above 6000 by late 2007.

In the 2008, Central Huijin Investments began to support the financial sector by increasing its holdings of bank shares. The Shanghai A-Share Index was among the first to bottom and led to the upside until mid 2009 when the scheduled release of previously non tradable shares increased supply and weighed on the market.

Central Huijin Investments is again increasing its position in China's banks. The deepening sense of pessimism internationally towards China's economic prospects and the near hysteria that has been aroused by the private lending debacle in Wenzhou may have prompted government action. To what extent they are willing to support the market has yet to be made clear.

In Hong Kong ICBC, Bank of China, Bank of Communications, China Construction Bank, China Merchants Bank, Agricultural Bank of China and China Citic Bank all accelerated lower, found at least short-term support last week and rallied well today. A closing of the oversold condition relative to the 200-day MA appears to be underway. Last week's lows will have to hold if medium-term support building is beginning.

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