All is fair in love and war. More so in a bearish market.
Chinese banks were not spared by a broad market selloff in Asian equities Monday as investors unloaded shares after Greece and its creditors failed to come up with a rescue plan that will prevent the country from defaulting on its debts.
The PBOC, China’s central bank, over the weekend announced a twin measure to support the stock market and boost the economy – another 25 bps cut on interest rates and a 50bps reduction in the reserve requirement. This is the first time in nearly seven years – the last time was during the financial crisis in October 2008 — that the PBOC simultaneously lowered its key rates and the bank reserve requirement ratio.
“Overseas fund managers are selling and getting out of the equities markets,” said Francis Lun, CEO at Geo Securities in Hong Kong. “They are afraid that the selloff will accelerate into a crash, so they are getting out and that includes selling shares in Chinese banks.”
Hong Kong-listed shares of Industrial and Commercial Bank of China were earlier down more than 7%, along with other Chinese firms traded in the city, according to MarketWatch. The Hang Seng China Enterprise Index lost 1.5%.
At the close of the morning trade, the Shanghai Composite Index was down almost 4%, reversing a 2% gain earlier in the day. The Hang Seng Index lost almost 3% at midday, according to Reuters.
“China failed to calm the nerves of investors despite the rate cut,” said Ben Kwong, COO at KGI Asia. “Investor sentiment is very fragile and prudent. Banks are not spared.”
While the rate cuts may squeeze interest margins of Chinese banks, in the long-run they will be good for their profitability and balance sheets because if the economy sustains its growth, then it would mean bigger demand for loans, more investment opportunities, and less defaults from their borrowers. The drop in reserve requirement ratios will also be good for lenders because it will stimulate borrowings, while leaving banks with more cash for lending and investment.
Chinese banks are not exposed to Greek bonds, said analysts. In fact, Chinese investors don’t have significant investments in the country at all.
According to the Financial Times, China’s Greek exposure is “relatively limited and principally of the concrete and steel variety.”
FT wrote:
“When China’s premier toured Greece last year, Chinese banks agreed to fund energy projects and shipbuilding contracts worth a relatively modest $4.1bn.”
Kwong said the Chinese stock market is already in correction mode, and this will probably continue for the next two weeks. Hong Kong will be dragged down by China, he said.
The next support level for the Shanghai Composite Index will be at around 3,800, while the HSI will be at 25,200, said analysts.
If Shanghai’s key index falls below 3,800 mark, that would be a signal for investors to come in, Kwong said.
“I will start to buy if the A-share market falls below 3,800,” Kwong said, adding that he will probably scoop up financial shares such as banks and insurers.
In a way, the analysts said the steep drop in Chinese equities will be good for the overall health of the market. It will also teach small Chinese investors to be more circumspect when buying shares, and to stop treating the stock market as a place to make quick profits, they said.
“A lot of retail investors now in China are losing money. You will hear a lot of sad stories. The correction in the market will teach them a lesson to be aware of the market risks. That the market has two possibilities — up and down,” said Kwong.
Photo credit: Aaron Goodman via Flickr