China takes further steps to bolster equities market
12 Oct 2012
Sentiment in Chinese equities has struggled again this week, when the market was disappointed that regulators had failed to announce large stimulus measures that had been widely anticipated. Chinese regulators have responded by easing the share buy-back approval process while Central Huijin Investment vowed to continue its purchases of Big 4 bank shares.
Rumours had circulated before the National Day holiday closure of a suspension of IPOs, fee reductions and other reforms intended to arrest the three-years slide in Chinese equities. However, with few material developments over the autumn holiday, markets returned in a bleak mood.
But support came early this week from Big 4 disclosures to the Hong Kong Stock Exchange that Huijin had been a substantial buyer of their equities in the third quarter. In the last three months, Huijin has added 6.26 million shares in Industrial and Commercial Bank of China, 7.38 million shares of China Construction Bank, 39.1 million shares in Agricultural Bank of China and 3.5 million shares in Bank of Communications on the Shanghai exchange.
The purchases would have cost just shy of RMB200m ($32m) and consolidate Huijin's position as by far the largest stakeholder in China's large listed banks. Huijin now owns 35% of ICBC's total float, 67.5% of BOC, 44% of ABC and 57% of CCB.
Also this week, steel giant Baosteel announced it had spent RMB600m to purchase 0.75% of its total listed equity, the first stage of a RMB5trn, 12-month repurchase programme announced in September. Speculation other large-caps would pursue this strategy has also boosted other flagship SOEs in recent weeks.
The move is apparently welcomed by regulators, with both CSRC and SASAC indicating their support for buybacks this week. CSRC announced it would be streamlining the buybacks approval process, while a SASAC official advised that it would be encouraging buybacks, naming China Coal and Yangtze Power as two potential candidates.
Certainly valuations are cheap in Chinese equities at the moment, while government support would seem to limit the downside. Long-term investors prepared to ride out the pain may well be handsomely rewarded.
But a harsher reality is that Beijing's attempts to diversify the A-Shares investor base are struggling amid extremely poor sentiment, and increased state ownership of key companies, albeit indirectly, can hardly be seen as progress.
Author: Iain Mills