China’s Sovereign Wealth Fund Buys Shares in Major Banks

That word, disclosed by the banks late in Monday’s trading session, helped their share prices rebound somewhat on the Hong Kong stock exchange.

Chinese bank stocks have lost a third of their value so far this year, with most of the losses since August. Compared with the battered stocks of many European banks, the decline does not reflect worries about Greek bonds — Chinese banks have very few — but rather about the effects of stricter capital requirements by China’s regulators and worries about possible losses on domestic loans.

The China Banking Regulatory Commission is putting heavy pressure on banks to raise capital. The regulators want to prepare banks to meet rising international standards for capital adequacy and to strengthen the banks’ balance sheets against possible losses on big loans issued to Chinese companies and local governments during China’s economic stimulus program in 2009 and 2010.

The Agricultural Bank of China, one of the four main banks that together control two-thirds of the Chinese banking market, has already said that it intends to raise more capital next year. And investors have been watching for moves to sell shares by the other three: the Industrial and Commercial Bank of China, China Construction Bank and the Bank of China.

“One of the things depressing the share prices is that the existing public shareholders worry that they’re going to get diluted,” said Nicholas R. Lardy, a senior fellow at the Peter G. Peterson Institute for International Economics in Washington.

According to filings the four banks made with the Hong Kong stock exchange, the share purchases on Monday were made by Central Huijin, a holding company that is part of the country’s sovereign wealth fund, the China Investment Corporation. Central Huijin has a tangled history that has complicated China’s ability to regulate its banks.

Central Huijin already owns stakes in the banks that range from 35.4 percent of Industrial and Commercial Bank to 67.6 percent of the Bank of China. The purchases Monday will not alter these percentages significantly.

The central bank set up Central Huijin in 2003 to bail out the country’s banks after a surge in losses on loans issued to politically connected, state-owned enterprises in the mid-1990s.

Central Huijin was transferred in 2007 to the China Investment Corporation, which had been set up to invest part of the country’s foreign exchange reserves in the stock market. The move was controversial, in part because it involved issuance of bonds to compensate the central bank for the transfer. China Investment promised that it would collect enough dividends from the banks to make payments on the bonds.

As a result of that promise, the big Chinese banks have been paying out roughly half of their earnings in dividends since then, compared with only 10 to 12 percent for many industrial companies. That has slowed the banks’ ability to comply with regulators’ demands to build capital reserves.

The high dividend payouts, in conflict with the need to raise capital, have started to prompt grumbling by Chinese bank executives. Xiang Junbo, the chairman of the Agricultural Bank of China, was quoted in July by The Study Times, a weekly publication controlled by the Communist Party School, as saying that the country’s big banks “should avoid high levels of dividend payments while we are frequently going to the market for fund-raising exercises.”

But Lou Jiwei, the chairman of the China Investment Corporation, has said that Central Huijin needs 300 million renminbi a day, or $47 million, just to pay the interest on the bonds issued to compensate the central bank. Central Huijin cannot easily sell its shares in the banks to raise money for servicing that debt, because this would increase the number of shares in public circulation and could further depress the stock prices.

The announcements by the big four banks reversed a slide in their share prices earlier in the day. They posted small gains by the close, except for China Construction Bank; it fell 0.21 percent on the day, closing at 4.83 Hong Kong dollars, but was up from earlier lows.

Another worry for the banks lies in their exposure to special borrowing units of local governments. China’s National Audit Office said at the end of June that those loans — mainly for infrastructure projects that helped China spend its way out of the global economic downturn — had totaled 10.7 trillion renminbi, or $1.7 trillion, by the end of 2010.

The debt burden from those loans is putting heavy pressure on local governments to raise the fees for water, sewage and other municipal services that were greatly improved with the loans, but which continue to be provided to the public for less than their cost, Mr. Lardy, of the Peterson Institute, said.

Article source: http://feeds.nytimes.com/click.phdo?i=38aa7018651d9b50f96045993c925c2d