Communist Party mouthpiece takes issue with Goldman Sachs report calling a ‘sell’ on some major Chinese bank stocks

The Securities Times pushed back against a report by Goldman that prompted a sell-off of some of the nation’s major state-backed banks
Chinese lenders have cut their exposure to the embattled property market this year, the editorial pointed out

Banking & finance

Zhang Shidongin Shanghai

Published: 4:28pm, 7 Jul 2023

Why you can trust SCMP

A newspaper owned by the Chinese Communist Party has pushed back against a report by Goldman Sachs that prompted a sell-off of some of the nation’s major state-backed banks.

“Pessimism” towards China’s banking industry should not be encouraged and is largely a “misinterpretation”, according to a front-page editorial published on Friday by the Securities Times, a newspaper run by the state-owned People’s Daily.

Chinese lenders have cut their exposure to the embattled property market this year, and the risk arising from local-government financing vehicles is manageable, with the government increasing its spending on infrastructure to bolster growth, the article said.

The commentary is a rebuttal to a research report issued on Tuesday by Goldman, in which the US investment bank cut its ratings on Industrial and Commercial Bank of China (ICBC), Agricultural Bank of China and Industrial Bank to “sell”, predicting their risk exposure to local government debts will erode earnings and dividend payouts.

The bearish call contributed to a sell-off that plunged the Hang Seng Index towards a bear market and sent the yuan to its weakest level against the US dollar in eight months.

Chinese banks may benefit from more opportunities arising from government-linked business going forward as China moves to wean itself off its dependence on land for fiscal revenue and shifts towards relying on revenue from the digital economy, the Securities Times said in the editorial.

Meanwhile, increased infrastructure investments will defuse the risk from local-government debt by improving cash flow and profitability at local financing vehicles, it said.

“While banks are pressured fundamentally amid a slow economic recovery, their asset quality is stable, the valuations are low and so is investors’ positioning,” said Jia Jing, an analyst at Huachuang Securities in Shanghai. “The upcoming implementation of additional supportive measures and a recovery in confidence will drive the recovery of both industry fundamentals and valuations.”

A gauge of 20 Chinese banks listed in Hong Kong is trading at an average of 73 per cent of book value, according to Bloomberg data. The sector has remained a perennial drag on the broader market amid worries about asset quality and growth prospects.

The index has dropped 5.5 per cent this week, the worst performance over a five-day period for a year. Hong Kong-listed shares of ICBC and Agricultural Bank have slumped 14 per cent and 7.5 per cent respectively, this week, while the stock of Industrial Bank has lost 0.8 per cent in Shanghai.

Chinese banks’ combined 40 trillion yuan (US$5.5 trillion) exposure to local-government financing vehicles that are struggling to repay debts because of declining fiscal revenue will have a limited impact on earnings, according to Guosen Securities. In the worst-case scenario, the risk will chip away at most 135 billion yuan of profit, or an equivalent of 6 per cent of the industry’s aggregate net income last year, it said.

As a proxy for the economy, banks may get a boost from more measures aimed at stabilising growth in the second half of the year. Possible additional stimulus tools include lowering borrowing costs further, boosting fiscal expansion and restructuring or swapping local-government debts, according to Wang Tao, chief China economist at UBS Group.

Net income for Chinese listed banks rose 2.1 per cent from a year earlier in the first quarter, slowing from 7.6 per cent full-year growth in 2022, as net interest margins narrowed on lower lending rates, according to Dongxing Securities.