Chinese banking stocks are surfing a tide of optimism not seen since the nation’s 2015 equity bubble, as traders look to state lenders to galvanize a long-awaited market rally.
(Bloomberg) — Chinese banking stocks are surfing a tide of optimism not seen since the nation’s 2015 equity bubble, as traders look to state lenders to galvanize a long-awaited market rally.
The CSI 300 Financials Index jumped for a fifth session on Monday to reach its highest level since April 2022, adding $166 billion in market value in the process. The gains were led by state-owned lenders including China Citic Bank Corp. as well as Bank of China Ltd., which hit the 10% daily limit-up for the first time since July 2015.
With China’s reopening trade stalled, Chinese investors are betting on a pledge by Beijing to let state-owned firms have access to more capital and play a bigger role. New guidelines on bond sales by SOEs is seen as another step in the reform as President Xi Jinping reshapes the economy. The frenzied trading has also been attributed to moves by three nationwide lenders to cut deposit rates to boost profit margins.
It’s a “valuation system with Chinese characteristics” story, said Willer Chen, a senior analyst at Forsyth Barr Asia Ltd. Some investors are also “seeing value in bank stocks because their valuation is cheap and dividend yields are attractive, despite the shrinking net interest margins and weak Q1 results.”
For now, much of the gains may be driven by sentiment, rather than fundamentals. Chinese lenders posted a tepid set of first-quarter earnings as they faced deeper margin woes despite being sheltered from the recent global banking jitters. Analysts say the pressure may persist through the year as lending rates are lowered to revive the economy.
Read: China’s Big Banks Post Scant Profit Gains as Margins Shrink (2)
The dramatic moves on Monday are uncommon for Chinese lenders, which are considered value stocks given they have long traded far below book value and underperformed the broader market. Concerns about property-related bad loans and a long-term structural slowdown of the economy have weighed on the sector.
A gauge of major lenders in Shanghai and Shenzhen traded at around 0.6 times book value, compared with an average of 0.8 times in the past five years, according to data compiled by Bloomberg. The average is on par with the price-to-book ratio for a Bloomberg index tracking Asian bank shares.
“The market has a preference toward assets with less volatility, low valuations and stable cash flow in times of contracting monetary conditions and uncertainty,” said Zeng Jiqing, Managing Director at Beijing Nuohua Fund Management Co. Boosting SOEs “is of high priority to the authorities this year, and has been an instruction from the highest level. We’re still just in a phase of valuation recovery, and not yet in valuation expansion.”
Investors have been searching for triggers for the next leg of a Chinese stock rally after the reopening euphoria faded. While the broader market has been largely rangebound this year, traders have jumped on sectors such as state-owned telecom operators and energy firms, as well as artificial intelligence-related shares.
The rally in Chinese banks comes amid deep skepticism over the nation’s economic recovery, with the latest manufacturing and services data trailing economists’ estimates. Sovereign bonds have rallied in a sign that traders are pricing in a slowdown. The MSCI China Index’s 5.2% decline in April means it has lagged almost every other global benchmark.
The contrast with US banks is also stark, with the KBW Bank Index sliding to its lowest level since 2020 as more US regional lenders succumbed to fears of losses on bond investments. But, there are few signs to suggest that foreign investors are seeking an alternative in Chinese lenders.
For one, Monday’s gains are more pronounced in onshore-listed banks with a significant surge in volumes, compared with those that trade in Hong Kong. The amount of Bank of China shares that changed hands on the mainland was more than four times its three-month average.
The rally in banking shares was triggered by the nation’s efforts to enhance return on equity for state-owned enterprises, Haitong International Securities Group Ltd. analyst Lin Jiali wrote in a note. With a dearth of favorable assets in the credit market, some stable and high dividend stocks like banks will become substitutes, he added.
–With assistance from Zheng Li.
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