Email of the day
Comment of the Day

June 21 2013

Commentary by Eoin Treacy

Email of the day

on China's tightening
“The following is from DB's top rated HK Banks analyst Tracy Yu given the uncertainty being caused by widely reported spikes in SHIBOR that are driving miners lower and being held out as possible signs of broader macro uncertainty in China.

“We believe the market has misunderstood the fundamental impacts from the sharp spikes in SHIBOR on the H-share listed banks and has over-reacted to the unexpected yield curve inversion.

“Why hasn't the PBOC stepped in to intervene?
We have spoken to our industry contacts and the management of the big four banks to try and understand why PBOC did not immediate inject liquidity to address the short term supply/demand imbalances of inter-bank funds .

"Our understanding is that the PBOC does not consider there to be any structural abnormality in the money market and thus, might be using this incident as an example to penalize banks that have not reserved sufficient liquidity ahead of the increase in seasonal demand for funds.

"As such, we believe this might be a test to discourage banks' reliance on policy intervention and to encourage them to rely more on market mechanisms to manage their own liquidity risks.

"Valuation impact
With valuation having fallen to 0.9x 2013E P/B (ROAE: 19.3%) and 5x 2013E P/E, we believe the risk reward of the H-share listed banks are compelling, despite mounting near term headwinds"

Eoin Treacy's view Thank you for this informative synopsis contributed in the spirit of Empowerment Through Knowledge. In yesterday's Comment of the Day I highlighted the Chinese version of the TED spread which had hit new five-year highs as a result of the PBOC's tightening. The yield curve is also worthy of mention because it is inverted right across the short end according to this chart from Bloomberg.

Both these measures highlight just how tight conditions within the financial sector have become. This pressure has fallen most heavily on highly leveraged market participants, not least in the shadow banking sector. The opacity of that market has contributed to a loss of faith among investors in the fundamental value metrics of the market. Until we see some clarity from the PBOC on policy, the potential for additional downward pressure cannot be ruled out. If the PBOC wishes to avoid a disorderly outcome they will need to act carefully and therefore the likelihood of monetary easing is increasing as the PBOC achieves its aim of chastising the shadow banking sector. We will of course be guided by the price action.

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