In-depth report 17 May. 10
Financial Services Sector Policy
Liquidity is King
The Chinese government is, again, trying to implement mutually contradictory economic policies. It is in the process of tightening money supply in order to prevent inflation and housing price bubbles, which has had a knock-on effect of causing the slump in the stock market. At the same time, it needs the stock market to remain buoyant in order to support the potential 287bn yuan of bank capital raisings and the 150-200bn yuan IPO of Agricultural Bank of China. Without these, the banks cannot continue to lend sufficient amounts to support economic growth. This means the government is searching for other sources of non-inflationary liquidity to support the market, including directing banks to the H share market, and expanding margin trading and index futures to both domestic institutional investors and QFII. In tandem with investors switching out of property investments into stocks, Central Huijin buying bank shares and NSSF pledging support for index futures, this potentially puts a floor under the market at current levels.
Financials Sectors To ebb… In response to the April economic data showing increased bank lending, higher property prices and rising inflation, the government is likely to continue to increase credit Banks controls, enhance the implementation of property policies, and resume RMB Policy: Negative appreciation in the near future to head off inflation. Outlook: Negative However, before adjusting the exchange rate, PBOC will continue to control the pace Insurance and direction of bank lending and use open market operations and adjustments to the Policy: Neutral reserve requirement ratio to remove liquidity from the banking system. These efforts, Outlook: Neutral combined with a switch in investment from stocks to property market, have contributed to the 20% drop in the CSI 300 in the year-to-date. Securities Policy: Positive While this in itself would not be a major issue, and possibly even beneficial in the long Outlook: Positive term, the problem is that the government needs to pump the market back up again in order to complete the bank’s capital raisings. … and flow There is the potential that some of the money being forced out of the property market may feed its way back into stocks, as there are few other avenues for investment, particularly against the current environment of negative real interest rates on deposit accounts. On the policy side, however, the two responses appear to be: a) To increase liquidity at the domestic stock market through margin trading and stock index futures. Extending the market from retail investors to funds, QFII and securities houses in the near future should boost the market. b) To tell the banks to raise cash through the H share, rather than A share market. While in the short term, this is likely to push shares down further, the result of all this is that H share investors are effectively buying Chinese government debt through equities.
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Further tightening to come April economic data painted a negative picture for inflation, with CPI and PPI rising faster than expected, bank lending increasing ahead of expectations and property prices continuing to rise, so continued monetary tightening is firmly on the cards. With increased liquidity withdrawals through open market operations since the Spring Festival (removing 1.1trn yuan from the banking system through last week – see chart 2) and the recent 50bp hike to the reserve requirement ratio, PBOC has brought M2 growth down from a high of 29.6% yoy in November to 21.5% yoy in April (see chart 1). PBOC has targeted 17% growth for the full year, so further tightening is likely to come in order to meet this target and head off inflation expectations.
Chart 1: Money supply growth (% chg yoy)
45% M2 40% M1 35% M0
30%
25%
20%
15%
10%
5%
0%
-5% Jun-09 Jun-08 Jun-07 Jun-06 Jun-05 Mar-10 Mar-09 Mar-08 Mar-07 Mar-06 Mar-05 Sep-09 Dec-09 Sep-08 Dec-08 Sep-07 Dec-07 Sep-06 Dec-06 Sep-05 Dec-05 -10% Dec-04
Source: PBOC
Chart 2: PBOC weekly net injections/withdrawals from the banking system
400
300
200
100
RMBbn 0
-100
-200
-300 03/09/2009 17/09/2009 30/09/2009 15/10/2009 29/10/2009 12/11/2009 26/11/2009 10/12/2009 24/12/2009 07/01/2010 21/01/2010 04/02/2010 25/02/2010 11/03/2010 25/03/2010 08/04/2010 22/04/2010 06/05/2010
Another 50bp hike to the As part of the general tightening of monetary policy, it is likely that the reserve RRR likely requirement ratio will be raised again by another 50bps in the near future, bringing the RRR to 17.5%, the same as the peak level in H2 08. PBOC is also likely to continue to withdraw money from the banking system using open market operations. Since the beginning of the year, PBOC has removed 679bn
2 Financial Services Sector Policy
yuan from the banking system, and this is likely to continue in order to slow the growth in M2. If the three reserve requirement ratio hikes are factored in, PBOC has removed roughly 1.6trn yuan from the banking system in 2010. Bank lending to be tightened In addition to general tightening of monetary policy, the implementation of credit controls will become stricter, particularly where it relates to lending for second and third-home mortgages. This is likely to take the form of stricter implementation of previously announced policies, as opposed to new policies. In April, new long-term household lending reached 230bn yuan, up 134% yoy, contributing to the 12.8% yoy increase in house prices in April across 70 major cities, which in turn made housing costs in the CPI figure increase to 4.3%.
Chart 3: Long-term household lending and % of total lending
400 80%
350 70% LT Household lending 300 % of total lending 60%
250 50%
200 40% RMBbn 150 30%
100 20%
50 10%
0 0% Jul-2009 Apr-2009 Apr-2010 Oct-2009 Jan-2009 Jun-2009 Jan-2010 Mar-2009 Mar-2010 Feb-2009 Feb-2010 Aug-2009 Sep-2009 Nov-2009 Dec-2009 May-2009
Source: PBOC
At the beginning of H2 09 banks significantly increased long-term lending to the household sector, the vast majority of which is mortgage lending, with long-term household lending accounting for 50% of total lending in H2. While the share of long- term household lending has fallen to around 30% in Q1 10, it is still much higher than the 8% of total lending seen in H1 09.
Mortgage lending likely to As the government wants to see house prices growth slow to below 10% from the decrease from current current 12.8% growth, the current high level is unlikely to be maintained as the levels implementation of the current restrictions on mortgage lending is expected to become stricter. Liquidity and the stock market The tightening of liquidity will be a necessary step for the Chinese government to reduce inflation expectations and cool property price growth. The problem with the tightening is its effect on the stock market, as stock market movements in China can be roughly correlated with the growth of the money supply (see chart 4), meaning monetary policy tightening may continue to have a negative effect on the stock market.
Switch between property The correlation is not perfect, with other factors such as QFII funds and investor’s and stock investment preference from property investment over stock investment playing a factor. Chart 5 shows ‘other deposits’ in H2, which are essentially stock market accounts, and property deposits. At end-08, the increase in ‘other deposits’ drove the stock market higher, while starting in H2 09 when ‘other deposits’ began to fall, property deposits increased. This also means that the current round of tightening in the property sector could increase stock market liquidity, given the lack of other investment channels in China.
3 China Policy In-depth
Chart 4: The stock market and money supply growth
45% 7,000 M2 40% M1 6,000
35% CSI300 (RHS) 5,000 30% 4,000 25% 3,000 Index 20% 2,000 15%
10% 1,000
5% 0 Feb-05 Feb-06 Feb-07 Feb-08 Feb-09 Feb-10 Aug-05 Nov-05 Aug-06 Nov-06 Aug-07 Nov-07 Aug-08 Nov-08 Aug-09 Nov-09 May-05 May-06 May-07 May-08 May-09 May-10
Source: PBOC
Chart 5: Deposits and the stock market
1200 M2: Quasi money: Other deposits 5000 1000 Property deposits 4500 CSI300 (RHS) 800 4000
600 3500
400 3000
200 2500 Index RMBbn 0 2000
-200 1500
-400 1000
-600 500
-800 0 Jul-08 Jul-09 Jan-08 Jan-09 Jan-10 Mar-08 Mar-09 Mar-10 Sep-08 Nov-08 Sep-09 Nov-09 May-08 May-09 May-10
Source: PBOC
From 2005 to 2008, new increased property deposits averaged 76bn yuan per month, while new monthly inflows into ‘other deposits’ averaged 37bn yuan. In H1 09, when money was being directed towards the stock market ‘other deposits’ increased by an average of 328bn yuan per month, partly reflecting the use of bill financing for stock market investment, as highlighted in our report, Chinese A-Shares, The Liquidity is Repaid 11/08/10. Then, in H2 09, when bill financing was being repaid and investment in the property sector was being further encouraged, ‘other deposits’ fell by an average 125bn yuan per month, while new property deposits increased by an average 169bn yuan per month. Now, with funding channels for property investment being shut off and investment in the sector being discouraged, it is possible that some of the extra money that has gone into the property sector over the past year may find its way back into the stock market.
4 Financial Services Sector Policy
Table 1: Average monthly new property and ‘other deposits’ RMBbn Property Other deposits 2005-2008 75.9 36.8 H1 09 96.0 328.0 H2 09 169.3 -124.5 Oct 09 – Mar 10 156.6 61.6
Funding in addition to / less than 05-08 trend amount H1 09 20.1 291.1 H2 09 93.4 -161.4 Oct 09 – Mar 10 80.7 24.8 Source: CEIC, FCI Research
While the government would not normally consider the stock market when crafting policies, as its primary concern is keeping inflation under control and promoting the peoples’ welfare, the success of the Agricultural Bank of China IPO is an important milestone for China, which is a large concern for the Chinese government.
Institutional investor The seemingly contradictory goals of increasing stock market liquidity while tightening participation in margin monetary policy may be possible by extending margin trading from simply retail trading could provide investors to include funds, securities houses and QFII, which may happen soon. needed boost As only retail investors have been allowed to participate, volumes have remained low, with the balance of margin trading and securities lending reaching just 423m yuan on 14 May in Shanghai compared to an average daily market turnover of over 90bn yuan. If institutional investors are allowed to participate in the market, however, volumes could increase substantially, with non-inflationary market liquidity increasing through leverage. At the same time, the State Council is encouraging banks to conduct their rights issues in Hong Kong as opposed to Shanghai, having just approved 287bn yuan of fundraising for BOC, ICBC, CCB and BOCOM. This will further alleviate liquidity pressures on the domestic market ahead of the ABC IPO, although has the perverse effect of meaning that the Chinese government is funding its remaining economic stimulus spending through HK share issues.
5 China Policy In-depth
Policy: Negative Banks Outlook: Negative Performance: 1mth: -13.7%, 3mth: -7.3%, YTD: -17.8%
Key Policy Themes • While banks heeded the calls of the regulator to slow lending in Q1 10, with the loan books of H share banks expanding by around 7% from FY09, April lending came in at 774bn yuan, ahead of forecasts, which will likely lead to further tightening. • In line with this, the regulator has continued to stress strict implementation of lending quotas, with PBOC saying it will increase window guidance in its Q1 10 monetary policy report, and stricter implementation of mortgage policies also likely. In addition, CBRC has emphasised the need to improve risk management, with reducing credit risk becoming its main focus for 2010. • There are also currently risks from general monetary tightening. PBOC recently raised the reserve requirement ratio for the third time this year by 50bps, bringing the RRR to 17% for large banks. Another 50bp increase is likely in the short term, with any further increases likely to weigh more heavily on smaller banks that have higher loan-to-deposit ratios. • Even without the regulator implementing stricter lending controls, banks may have trouble lending, given their eroded capital bases and the sector’s falling excess to the reserve requirement ratio, which fell from 3.13% at FY09 to 1.95% at Q1 10. Any additional tightening will reduce this further, putting banks under additional pressure until their capital raisings are completed. • The pressure on banks’ fundraising plans was partly alleviated after Central Huijin announced it would support the large banks’ fundraising plans. However, in light of falling liquidity on the domestic market, the State Council encouraged banks to conduct the majority of their fundraising in Hong Kong when it approved 287bn yuan of fundraising plans for the big four listed banks on 13 May. Even with fundraisings moved to Hong Kong, timing will still be an issue, as the priority of the government is to complete the Agricultural Bank of China IPO successfully. If fundraisings are delayed as a result, banks’ lending capacity will be further constrained. Major Sector Trends: Over the last month, the regulator has continued to stress the need to control the pace of lending and enhance risk controls, with particular focus paid to loans to the property sector and to local government financing platforms. In Q1, new loans to the property sector reached 845.7bn yuan, up 44.3% yoy, accounting for 32% of loans in Q1. CBRC had previously said that banks should closely monitor changes to the property market and strictly adopt related credit policies. In reality, however, commercial banks continued to lend to the property sector, contributing to the rise in house prices.
Lending to property sector This was then reflected in the April economic data, which showed property prices rising has accelerated, driving 12.8% yoy, up from 11.7% in March, with long-term household lending reaching 230bn prices up yuan, up 134% yoy. Before the April data was released, the regulator began implementing stricter policies that were aimed at limiting the demand for loans, including: • Deposits on first-home mortgages for houses greater than 90sqm will be raised from 20% to 30% • Deposit on second-home mortgages will be increased from 40% to 50% and the mortgage rate will be increased to 110% of the benchmark rate • Banks can stop issuing third-home or above mortgages
6 Outlook: Negative
• Banks can refuse to issue loans to individuals who cannot prove they either paid taxes or made social security contributions for at least on year in the city where they intend to buy a house • Banks must conduct quarterly stress tests on property loans
Stricter implementation of As property prices continued to rise in April at an accelerated pace from March, the previously released implementation of the new policies on mortgage lending is likely to become stricter. For mortgage policies example, while Beijing implemented the new policies on second and third-home mortgages strictly to the letter of the national government notice, Shenzhen and some other cities implemented them with a greater degree of flexibility. The degree of flexibility was intended, as it is clear that the regulators want to see property prices fall by around 10%, but do not want to kill the sector. The main goal of the regulator is not to restrict construction and property development explicitly, as real estate and construction accounted for 9% of GDP growth in 2008, but to reduce speculation in the sector. This is being done through encouraging mortgage loans for primary residences, while restricting mortgages for second and third home purchases. The implementation of policies to restrict speculative buying is likely to become stricter, which will likely translate to slower loan growth for banks. Risks of default from property, LGFP loans is limited The stricter implementation of property policies, while leading to slower loan growth, is unlikely to lead to large non-performing loans. Because banks will still have a degree of flexibility in implementing policies, a 30% fall in prices in unlikely, with a fall of around 10% being a more likely outcome. As a result, the overall impact on the banking sector will be limited, as many of the current worries are based on a more substantial deterioration in property prices. The other main risk to loans comes from local government financing platforms. In the two notes we have written on this topic, China Indepth: Local Financing, The Hole Story 26 March 2010 and China Insight: Banks’ Local Government Exposure 19 April 2010, we outlined the potential 1.5trn yuan black whole and individual banks’ exposure. However, the actual problem for the bank is generally overstated, as these loans are implicitly backed by the central government, therefore making it a fiscal problem. That being said, stricter measures to identify guarantees for specific loans are likely to be implemented, especially given reports that 40% of bank lending in Q1 10 went to local government financing platforms, which could potentially accelerate the recognition of NPLs. While this would likely be a good thing in terms of risk control, it could also mean that banks would have to reflect the loss on their balance sheets in the short term, which could weigh on the sector. Monetary policy tightening to continue The slowdown in mortgage loans has also had a knock-on effect in terms of increased banking sector liquidity. On 22 April, PBOC issued 90bn yuan of three-year notes, up from 15bn yuan in the previous issue, with the interest rate on these newly issued notes falling 1bp to 2.74%. On 6 May, the issuance volume was increased to 110bn yuan, yet the yield on these notes fell another 2bps to 2.72%. It is likely that the fall was due to increased liquidity in the sector, which may have also been one of the reasons why the PBOC increased the reserve requirement ratio by 50bps, effective 10 May, which removed roughly 320bn yuan from the banking sector.
Further monetary As bank lending in April came in at 774bn yuan, another 50bp increase to the reserve tightening to limit banks’ requirement ratio is also likely in the short term to continue tightening, with the effect lending capacity likely to be felt more by the smaller banks with lower loan-to-deposit ratios, while the effect on the larger state-owned banks would be limited. An increase in interest rates, however, which is now looking more likely to be in Q3 or Q4, would not necessarily be negative for the banks lending While consumer loan volumes would likely fall, the majority of loans, which are taken out by SOEs for government mandated projects, will be unaffected.
7 China Policy In-depth
Major Companies: In Q1 10, the banking sector reported higher profits from fee-based income, while capital ratios were maintained as the pace of lending slowed. This may have reduced the urgency with which banks need to conduct their capital raisings, especially for the large state-owned banks. This is particularly the case for Bank of China, China Construction Bank and ICBC, as they were supported by Central Huijin to reduce their dividend to shore up capital. In addition, Huijin said it will take part in their fundraising plans, reducing pressure on these banks. Following Central Huijin pledging its support for the capital raisings, the State Council approved 287bn yuan worth of capital raisings for ICBC (70bn yuan), BOC (100bn yuan), CCB (75bn yuan) and Bank of Communications (42bn yuan). The State Council also encouraged the banks to conduct a larger percentage of the fundraisings in Hong Kong, likely owing to the reduced liquidity on the domestic market.
Successful ABC IPO is the This partly reflects the priority given to the estimated 150-200bn yuan IPO of top priority of government Agricultural Bank of China, which now looks likely to take place before the capital raisings, as the government would like to see the IPO succeed when it is being closely watched on such a global level. With bank capital raisings being postponed, sector lending will also be further tightened, in line with the government’s overall monetary policy tightening. Of the three largest H share banks, CCB has so far announced the largest capital raising, with plans to issue 7 new shares for every existing 100, raising up to 75bn yuan through a right issue. It currently has the second highest capital adequacy ratio, at 9.17%, but with a total capital adequacy ratio of 11.44%, against the regulatory minimum of 11%, its lending could be restricted until it raises capital. ICBC remains the best capitalised of the Chinese banks, with a core capital adequacy ratio of 9.58% and total capital adequacy ratio of 11.98%. It is thought that both ICBC and BOC have abandoned plans to issue convertible bonds as a result of Central Huijin announcing it will support its capital raisings. It is now thought that ICBC will issue 1.5 for every 10 shares, raising up to 70bn yuan. Bank of China is also likely to adjust its capital raising plans and conduct a rights issue, although no details have been given on size. It has the third highest core capital adequacy ratio at 9.11%, but is close to the regulatory limit of 11% for total capital adequacy at 11.09%. The State Council recently approved BOC fundraising totalling 100bn yuan, although the bank has yet to announce details. In Q1 10, Bank of Communications, despite meeting all regulatory requirements for capital adequacy and NPL provisioning, reported that its total value of NPLs increased from FY09. Given the current concerns over this sector, the bank could come under pressure in the short term. At its results, the bank said it is working on its plans to raise 42bn yuan through a rights issue, but gave no indication of timing. China CITIC Bank reported an increase in NPLs to the property sector and missed regulatory targets for capital adequacy, reporting total capital adequacy ratio of 9.34% against a regulatory minimum of 10%. In an attempt to shore up its capital, the bank has announced plans to sell 16.5bn yuan of subordinated bonds. Even after raising capital, China Merchants Bank reported a total capital adequacy ratio of 11.53% at Q1 10, compared to the regulatory limit of 11%. With a loan-to- deposit ratio of 76%, the bank may be constrained in lending in 2010. While China Minsheng Bank did not report capital adequacy ratios, the total value of NPLs increased by 58m yuan to 7,455m yuan. While not a substantial increase, it compares to a sector trend of NPL reduction.
8 Outlook: Negative
Table 2: Banks Sector Monthly Policy DATE Policy and Comments State Council Said to Approve 287bn Yuan The State Council has approved a combined 287bn yuan of fundraising by BOC (100bn yuan), CCB (75bn of Bank Fundraising yuan), ICBC (70bn yuan) and BOCOM (42bn yuan). Although the refinancing plans of some banks may be 13 May different from what was previous released, the scale of refinancing will not be changed. Loan Standards for Local Financing PBOC issued 20bn yuan of three-month bills and 90bn yuan of 91-day repurchases today. The interest rate Platforms to Be United in Future on three-month bills is 1.4088%, the 16th time for it to remain the same, lower than the 1.47% at the 12-May secondary market. PBOC also issued 14bn yuan of one-year bills on Tuesday, and considering that a total of 216bn yuan bills and repurchases will mature this week, up 94bn yuan that last week, PBOC will realise a net injection of 152 bn yuan into the open market this week. This follows 11 straight weeks of net withdrawals when PBOC withdrew 1.1trn yuan from the banking system. PBOC’s hike to the reserve requirement ratio came into effect this week, removing roughly 320bn yuan from the banking system, which contributed to the slowdown in bill issuance. The slowdown in PBOC’s withdrawal is only a temporary phenomenon. Next week, only 95 bn yuan bills and repurchases will mature, while three-year notes will also be issued, which means net withdrawals are likely again. Standard for Identifying Second-Home The Ministry of Housing & Urban-Rural Development is formulating standards for identifying second-home Mortgage Being Formulated mortgages with PBOC and CBRC, as required by the State Council, according to the ministry?s vice 10-May minister Qi Ji. Qi Ji said that household ownership will be determined by families and not individuals. Qi Ji also said that feedback from local markets show that the rapid growth trend in certain cities has begun to come under control. He also said that the social housing construction plan for 2010-12 will be released to the public before the end of July. 40% of New Loans This Year Went to Local In the first few months of the year, roughly 40% of new bank loans have gone through local government Financing Platforms financing platforms, with the scale of local financing platform liabilities increasing rapidly, according to Wei 10-May Jianing, vice director of macroeconomics at the Development Research Centre of the State Council. In the past, there were 2-4 financing platforms for each level of local government, but this increased to over ten in 2009. There are c.3,800 local financing platforms nationwide, of which 70% are county level. Jia Kang, director of Research Institute for Fiscal Science in MOF, said that he does not consider the total amount of local financing to be problematic, but said that the biggest problem in local financing lies in the lack of regulation. Regulation Details on Property Market The new property market policies for Shenzhen were released yesterday, which basically reiterated the Released in Shenzhen newly released national policy. It should be noted, however, that Shenzhen government has stopped the 7-May trading of social housing. If social housing is transferred or sold, the government will repurchase these houses and then reallocate. The local government also pointed out that in 2010, it will start construction of 50,000 new social housing units, supply and distribute 10,000 pre-existing units and provide residential subsidy for 5,000 low-income families. Central Huijin Supported Three Banks to Central Huijin said that it supported ICBC, BOC and CCB to reduce their 2009 dividend payout ratios from Cut 2009 Dividend Ratio 50% to 45% to improve their capacity to supplement capital through profit retention. Central Huijin also said 4-May it will support and participate in those banks’ refinancing plans. According to the original plan, Central Huijin can receive 20.1bn yuan, 24bn yuan and 26.9bn yuan of dividends from ICBC, BOC and CCB, respectively. With the 5% decline, the three banks can reduce their overall dividend payments by nearly 7bn yuan, while the payout to Central Huijin will decline by 3.55bn yuan. With the A share market continuing to decline and financial shares also falling, Central Huijin’s announcement was made as a signal to maintain the market stability and ease banks’ financing pressures. New Regulations to Limit Speculative On April 30, the Beijing Government issued new property regulations requiring commercial banks to House Purchases suspend issuing third home or above mortgages and loans to non-local residents who cannot provide 4-May evidence of local tax payments or social insurance contributions for at least one year. It also released a temporary regulation saying that one family can only purchase one new commercial house in Beijing. Reserve Requirement Ratio Raised for PBOC will raise the reserve requirement ratio by 50bps from 10 May, the third increase this year, bringing Third Time in 2010 the RRR to 17% for large banks, while rural credit cooperatives and village banks are temporarily 4-May unaffected. This compares to the high of 17.5% for large banks in June 2008. Based on the value of yuan deposits at the end of March, this increase will remove almost 320bn yuan from the financial system. Rules on Housing Provident Fund for The Ministry of Housing & Urban-Rural Development is working on detailed rules for second home Second Homes to be Released purchases using individuals’ employer-backed savings funds, with the goal of partly restricting the use of 28-Apr these funds to curb speculation without hurting real demand. In addition, the funding sources of property developers will be tightened. Relevant regulators intend to include trust loans into the scope of regulation on establishing quotas on the total lending scale. Currently, banks with tight lending quotas allow trust companies to lend on their behalf, with trust loans reaching 400bn yuan in Jan-Feb, accounting for a fifth of total loans. With this new regulation, real estate trust financing will also be tightened. SAFE is also currently investigating foreign capital inflow in different regions, focusing on channels, scale and direction of foreign capital inflows. Source: FCI
9 China Policy In-depth
Table 3: Banks Sector Monthly Policy DATE Policy and Comments New Restrictions on Shareholdings of Regulators plan to increase the entry barrier for shareholders taking a stake in small and medium sized Smaller Banks banks, with a single shareholder prohibited from taking a stake in more than two banks of a similar size and 28-Apr business structure. If a shareholder has a controlling stake, it can only maintain a stake in one bank. BOC Implements New Property Policies Bank of China will adopt strict control over any kind of property speculations and will, in principle, suspend 26-Apr issuing third-home mortgage or above. Families which buy their first home below 90 sq m, will receive a lending rate of 85% of the benchmark rate, but first homes above 90 sq m, the deposit must be no less than 30%. Families which have a mortgage on their first home must have a 50% or greater deposit on their second, with an interest rate of 1.1x the benchmark. The bank will also raise the interest rate on all pre- existing mortgages. This follows China Construction Bank’s announcement on 21 April that it will begin implementing the new property regulations, while Bank of Nanjing has required a deposit of no less than 60% on third-home mortgages. BOC did not mention when its policies will be implemented, however. At the same time, CSRC will work with the Ministry of Land and Resources to tighten the regulation on property companies’ financing. The applications from 41 companies have been sent to MLR in order to make sure the companies’ purchase and use of land are in line with existing land regulations. Interest Rate Falls on Three-Year Notes PBOC issued 23bn yuan of three-month central bank bills and 90bn yuan of three-year central bank notes 22-Apr today, down 45bn yuan and up 75bn yuan from last week, respectively. PBOC also issued 35bn yuan 91- day repurchases today. Overall, the PBOC realised a net withdrawal of 65bn yuan this week, up from 14bn yuan last week. The interest rate on three-month central bank bills was maintained at 1.4088%, while that for three-year central bank notes was 2.74%, down from 2.75% a the last issuance on 8 April, when the issuance was resumed after being suspended since 26 June 2008. Banks Told to Conduct Stress Tests on CBRC has told banks to conduct quarterly stress tests on property loans, increase risk controls on loans to Property Loans the property sector and use mortgage policies to restrict housing speculation. In line with this, CIRC has 21-Apr reiterated that insurance companies should not invest directly in property. This follows recent announcements from CBRC telling banks to adopt new policies on second and third home mortgages, the implementation of which still depends on the final detailed regulations which are expected to come out soon. Banks May Face Large Loss if New LGFP To help recognise the risks of loans to local government financing platforms and to prevent local Regulations are Put in Place governments from using fiscal revenues as guarantees in the future, CBRC may require banks to change 16-Apr the type of guarantee for loans to local government financing platforms that are backed by local fiscal funds by the end of Q3. For those loans that don’t see their guarantees change, banks will have to set aside provisions of 20% of the value of the loans. Surveys show that over 50% of the estimated 6trn yuan of loans to local government financing platform were guaranteed by local fiscal funds, which means that banks may have to set aside up to 600bn yuan of provisions if this is implemented. State Council Stresses Curbing House The State Council said yesterday that factors driving prices up are emerging now, leading to increased Price Growth inflation expectations. In particular, house price increases are particularly pronounced in certain cities, 15-Apr including Beijing and Shanghai. The State Council again stressed the need to curb the quickly rising house prices. It said that local governments must become responsible for maintaining the healthy development of the property market. It also emphasised that China must increase the land supply for residential housing construction. To curb speculative house purchases, further differential credit policies should also be implemented. In addition, the State Council mentioned that the drafting of effective tax policies to guide personal house purchases should be accelerated. New Regulation on Capital Expected, CBRC is considering implementing more detailed regulatory measures on capital adequacy and may create Lending Risks Examined three to four different classifications for banks that have capital adequacy ratios above 8%. Currently, the 12-Apr CBRC requires that large commercial banks have a total capital adequacy ratio about 11%, while small and medium sized banks should be above 10%. During the classification process, several factors will be taken into account, including minimum and total capital requirements and the percentage of leverage. No details have been given on how restrictions would differ between classifications. At the same time, Liu Mingkang, chairman of CBRC said that banks must submit reports to the regulator outlining their loan exposure, including loans to property developers and local government financing platforms, by the end of June. After the reports are examined, the regulator may downgrade assets and increase provisions. Given the large risk exposure to the property sector, Liu said that banks should raise the minimum deposit and interest rate on loans if it is suspected to be used for property speculation.
Source: FCI
10 First China Invest Policy Sector Review
Market cap Perf Sales Banks m Price 1 mth 3 mth 12 mth YTD Price/ Book Price/ Sales Div Yield Curr Yr PE Next Yr PE Op. Margin Growth RoE 1398 HK IND & COMM BK OF CHINA - H 1,509,594 5.6 -7.1 -1.6 20.6 -12.9 2.4 3.5 3.3 10.5 8.8 52.9 0.2 20.2 601398 CH IND & COMM BK OF CHINA - A 1,509,595 4.4 -10.4 -10.6 2.3 -19.3 2.2 3.1 3.8 9.5 8.0 52.9 0.2 20.2 939 HK CHINA CONSTRUCTION BANK-H 1,266,387 6.2 -5.8 3.5 29.6 -6.9 2.1 3.1 1.5 9.6 8.1 51.2 2.2 20.9 601939 CH CHINA CONSTRUCTION BANK-A 1,266,403 5.0 -9.9 -12.1 8.7 -19.2 2.1 2.9 1.7 8.8 7.4 51.2 2.2 20.9 3988 HK BANK OF CHINA LTD-H 965,019 3.9 -3.2 1.0 36.1 -6.7 1.7 2.6 3.8 8.8 7.6 45.4 -5.8 16.6 601988 CH BANK OF CHINA LTD-A 965,019 4.0 -5.7 -4.1 9.7 -8.5 2.0 3.0 3.3 10.2 8.5 45.4 -5.8 16.6 3328 HK BANK OF COMMUNICATIONS CO-H 333,775 7.9 -14.4 -1.2 17.3 -11.9 2.1 2.6 4.3 9.1 7.7 45.2 2.3 19.5 601328 CH BANK OF COMMUNICATIONS CO-A 333,777 6.7 -18.1 -19.1 -6.7 -28.4 1.9 2.4 4.5 9.5 7.6 45.2 2.3 19.5 600036 CH CHINA MERCHANTS BANK-A 295,774 13.3 -15.0 -10.8 6.5 -22.0 2.7 3.2 0.6 11.7 9.5 42.1 -4.8 21.2 3968 HK CHINA MERCHANTS BANK-H 295,775 17.6 -11.6 -2.6 35.9 -8.3 3.4 4.4 1.8 12.8 10.4 42.1 -4.8 21.2 601998 CH CHINA CITIC BANK CORP LTD-A 186,684 5.2 -26.2 -25.1 2.8 -36.8 2.0 3.3 1.6 11.0 8.9 46.6 -7.6 12.8 998 HK CHINA CITIC BANK CORP LTD-H 186,685 4.4 -21.8 -19.7 11.0 -33.0 1.5 2.5 2.2 8.1 6.6 46.6 -7.6 12.8 600000 CH SHANGHAI PUDONG DEVEL BANK-A 164,769 18.7 -15.4 -5.8 3.9 -14.0 2.3 2.4 0.9 10.7 9.0 46.4 7.9 24.1 601166 CH INDUSTRIAL BANK CO LTD -A 133,400 26.7 -21.0 -21.7 -3.7 -33.8 2.2 2.3 3.6 9.0 7.2 53.7 -2.6 24.5 1988 HK CHINA MINSHENG BANKING-H 147,029 7.5 -7.3 -3.6 -13.9 1.6 2.0 #N/A N/A 10.3 8.4 49.5 3.9 17.1 600016 CH CHINA MINSHENG BANKING-A 147,029 6.6 -12.2 -9.2 2.0 -16.4 1.6 2.0 1.2 10.5 8.5 49.5 3.9 17.1 601169 CH BANK OF BEIJING CO LTD -A 82,328 13.2 -16.2 -16.8 0.2 -31.6 2.1 4.2 1.4 10.7 8.8 59.4 -7.1 15.8 000001 CH SHENZHEN DEVELOPMENT BANK-A 54,128 17.4 -20.8 -22.4 -0.4 -28.5 2.4 2.2 #N/A N/A 9.8 7.7 40.2 -14.9 27.3 600015 CH HUAXIA BANK CO LTD-A 52,500 10.5 -17.3 -3.0 3.4 -15.3 1.7 1.5 1.2 11.7 9.4 27.9 -12.0 13.0 002142 CH BANK OF NINGBO CO LTD -A 28,200 11.3 -28.0 -26.0 12.0 -35.5 2.7 4.2 3.5 15.3 12.0 41.3 9.9 15.7 601009 CH BANK OF NANJING CO LTD -A 24,668 13.4 -20.0 -19.5 -3.2 -30.6 1.9 4.1 2.2 12.3 9.8 51.3 4.9 13.2 Average 473,740 10.0 -14.6 -11.0 9.4 -20.6 2.1 2.9 2.4 10.5 8.6 46.9 -1.6 18.6
New Bank Lending 2.5
Mid-long term 2,000.00 Short term 2 Bill financing
1,500.00
1.5 IND & COMM BK -H
1,000.00 CHINA CONST BA-H BANK OF CHINA-H 1 HANG SENG FINANCIAL INDX RMBbn 500.00
0.5 0.00
0 -500.00 Jul-09 Apr-09 Apr-10 Oct-09 Jan-09 Jun-09 Jan-10 Feb-09 Mar-09 Feb-10 Mar-10 Aug-09 Sep-09 Nov-09 Dec-09 Jul-09 May-09 May-10 Apr-09 Apr-10 Oct-09 Jan-09 Jun-09 Jan-10 Feb-09 Mar-09 Feb-10 Mar-10 Aug-09 Sep-09 Nov-09 Dec-09 May-09
Source: Bloomberg, CEIC Policy: Neutral
Policy: Neutral Insurance Outlook: Neutral Performance: 1mth: -10.2%, 3mth: -0.5%, YTD: -5.4%
Key Policy Themes • While insurance companies have been increasing their equity holdings in property companies, CIRC reiterated last month that insurance companies should not invest directly in property. As the regulators are currently trying to slow credit to the property sector, it is unlikely that insurance companies will receive approval to invest directly in property in the short term. This is despite the announcement made in December on permitted investments of insurance companies which encouraged banks to invest in property, mostly infrastructure, without giving specific details of the permitted range of property investments. • Bancassurance in rural areas may be improved, following a joint announcement by CBRC and CIRC that enables farmers to use agricultural insurance as collateral for loans. This is another step in the trend of increased cooperation between banks and insurance companies, following a round of banks taking stakes in insurance companies in late 2009 and early 2010. • Insurance companies are likely to continue to come under pressure as long as tightening in the property sector continues, given their large equity holdings of property stocks. However, insurance companies have said they will increase the proportion of bonds in their total investment portfolios this year, which could offset some of the losses on the property portfolio should interest rates be increased. Major Sector Trends: This month, the CIRC reiterated that insurance companies are prohibited from investing directly in property. This announcement should not be surprising, given the current regulatory clampdown on credit and funding going into the property sector. Detailed regulations were expected to be released outlining the permitted investments of insurance companies in the property sector, but these have not yet been published. This comes after the CIRC issued The Interim Measure for Insurance Funds Management (Draft), outlining general restrictions on permitted investment channels for insurance companies. The legislation set restrictions on stock investments, prohibiting insurance investment in stocks on the start-up GEM board, and said that insurance companies will be encouraged to invest in property, mainly infrastructure projects, but are forbidden from investing in fixed assets without stable returns. They will be allowed to buy controlling stakes in other insurers, companies related to the insurance sector and non-insurance financial institutions, but cannot buy stakes in non-financial institutions.
With property prices rising Property would be a good investment channel for insurance companies, as the long-term more than 10%, insurance stable returns can be matched with some of the longer dated liabilities which the sector investment is industry is beginning to establish. However, as long as property prices remain high and unlikely to be approved a focus of media attention, it is unlikely insurance companies will be allowed to invest in the sector. The promotion of bancassurance has continued, with CBRC and CIRC jointly releasing a document which will enable farmers to take out agricultural insurance policies, with the banks required to accept these policies as collateral for loans. Banks should then determine the terms of the loan based on the type and proportion of the insurance taken out. It is unclear exactly how big this business will be for insurance companies, as the details of the size of the subsidies and level of support have not been given, but it should be well supported by the government, as it should help relieve the financing difficulty for
11 China Policy In-depth
farmers. As insurance companies will assume much of the risk of the loans from the banks, the insurance premiums may be high. National Social Security Fund The National Social Security Fund was announced as the only pre-IPO strategic investor in the IPO of Agricultural Bank of China. It is not surprising that NSSF would be involved in the IPO, as it currently holds stakes in almost all of China’s listed state- owned enterprises. Da Xianglong, chairman of the NSSF, said that the fund will invest at least 15bn yuan in ABC.
NSSF pledges to support In addition, Dai Xianglong said that NSSF is willing to invest in stock index futures, but index futures will do so through qualified NSSF managers rather than direct participation. In November 2008, NSSF announced it was buying equity shares in the open market, which provided a floor for the market. This announcement has similarly provided support for the nascent index futures market (see Securities section). Also, the NSSF is likely to increase overseas investment from the current 7% to 20%. Given that the NSSF has no major liabilities in the next 10 years, it plans to reduce investment in fixed-income products, maintain the proportion of domestic stock investment and increase industrial investment. As part of its plan to increase overseas investment, it will invest both in listed and non-listed overseas companies. It is interesting to note that as part of its plans to reduce investment in fixed income and increase equity investment, the NSSF did not mention plans to increase investment in the domestic stock market. Major Companies: With insurance companies still banned from investing directly in property, companies in the sector have resorted to buying property stocks. Given the current policy tightening in the sector, this is likely to continue to weigh on insurance shares. China Life Insurance has become the largest shareholder in Sino-Ocean Land, holding 24% of the company. In addition, China Life Insurance holds Hong Kong listed stocks including BBMG, South City, Hengsheng Real Estate and Longhu Real Estate, as well as Beijing Tianhong Baoye Real Estate, Shenzhen Heungkong Holding, Beijing Urban Construction Investment & Development, Gemdale and China Vanke listed on the A share market. According to the Hong Kong Economic Journal, Ping An Insurance is planning a 10bn yuan trust with Longfor Properties to develop property projects. This is in line with the company’s previous strategy, as Ping An Trust said in September that it would invest 15bn yuan in properties developed by Greentown China Holdings over the next three years, while it paid 1.6bn yuan in December for a 49% stake in a Shanghai property project with Gemdale. China Pacific insurance at its Q1 results said it will increase infrastructure investment this year. It currently has several investments in the sector which provide long-term stable returns to match against long-term life insurance liabilities.
Insurance companies China Life in April said it would increase the proportion of bonds in its investment increase fixed income portfolio this year in anticipation of interest rate increases. By the end of 2009, it had portfolios about half of its 1.2bn yuan of investment assets in bonds. Ping An also said it increased its bond holdings in Q1, and will look for opportunities in high-quality corporate bonds in the medium and long term. Ping An has also finally received approval to take over TPG Capital’s 16.76% stake in Shenzhen Development Bank, where it will issue 299m new shares to TPG, and will also purchase 585m new shares issued by SDB, with the approval for the new share issuance still needing CSRC approval. The combined deal will see Ping An increasing its stake in SDB to 30%. In addition, Ping An was also reported to be negotiating to purchase a stake in Shanghai Securities, but the company denied this in future reports. On an international level, there has been much discussion about Prudential’s possible US$35.5bn acquisition of AIA. Possibly the most prized of AIA’s assets is its Chinese insurance business, as it is the only foreign insurance company to hold a license to 12 Outlook: Neutral
operate in China without a joint venture. If Prudential succeeds in acquiring AIA, it will likely have to dispose of either AIA or its joint-venture with China CITIC Group. If it were to dispose of the stake in the joint-venture, the most likely buyer is CITIC (for further details, see our report China Insight: Pru and AIA 9 March 2010). However, it was rumoured last month that Prudential may sell the Chinese business.
Table 4: Insurance Sector Monthly Policy DATE Policy and Comments CBRC and CIRC to Introduce Agricultural CBRC and CIRC jointly released a document which will enable farmers to take out insurance and Loan Insurance commercial banks will accept the agriculture related insurance as an appropriate qualification to receive 28-Apr credit. Banks should then determine the terms of the loan based on the type and proportion of the insurance taken out. Regulations on Investment in Property to CIRC chairman Wu Dingfu said that detailed regulations on insurance funds investing in property and Come Out Soon private equity will come out soon. In order to prevent investment risk, insurance funds will be prohibited 14-Apr from investing in residential housing, participating in property development or directly investing in commercial property. As insurance premiums have been increasing rapidly, insurance companies must find new channels through which to allocate their funds. However, given the current risks of investing in the property market, CIRC has delayed releasing the relevant regulations. Several insurance companies have already made preparations for investing in property: China Life has become the biggest shareholder in Sino-Ocean Land, while Ping An signed a trust investment agreement with Gemdale and Greentown. Source: FCI
13 First China Invest Policy Sector Review
Market cap Perf Sales Insurance m Price 1 mth 3 mth 12 mth YTD Price/ Book Price/ Sales Div Yield Curr Yr PE Next Yr PE Op. Margin Growth RoE 2628 HK CHINA LIFE INSURANCE CO-H 717,671 33.6 -10.9 -3.3 21.8 -12.5 3.9 2.4 2.4 22.7 19.3 12.1 13.3 17.1 601628 CH CHINA LIFE INSURANCE CO-A 717,674 24.0 -16.6 -14.7 0.3 -24.4 3.2 2.0 1.0 19.6 16.5 12.1 13.3 17.1 2318 HK PING AN INSURANCE GROUP CO-H 367,092 59.7 -12.7 -3.5 20.9 -12.3 4.5 2.5 0.3 25.1 19.7 15.2 74.5 18.6 601318 CH PING AN INSURANCE GROUP CO-A 367,092 45.5 -10.9 -9.1 13.8 -17.4 3.9 2.2 0.3 25.2 20.6 15.2 74.5 18.6 2601 HK CHINA PACIFIC INSURANCE GR-H 212,191 30.5 -12.2 -1.5 3.0 1.1 23.9 19.6 9.5 36.8 11.9 601601 CH CHINA PACIFIC INSURANCE GR-A 212,191 23.9 -13.8 -3.9 35.3 -6.7 1.3 26.4 19.9 9.5 36.8 11.9 2328 HK PICC PROPERTY & CASUALTY -H 68,369 7.0 -8.6 -3.7 49.5 0.1 3.1 0.7 #N/A N/A 27.4 19.3 2.4 17.5 8.6 966 HK CHINA TAIPING INSURANCE HOLD 37,700 25.3 -9.6 3.3 94.6 0.8 4.2 1.1 #N/A N/A 32.2 23.6 5.5 109.0 9.5 Average 337,498 31.2 -11.9 -5.0 33.7 -9.2 3.7 1.8 1.1 25.3 19.8 10.2 47.0 14.2
Insurance Premiums
2 180 P&C Life 160 1.8
140 1.6 120 CHINA LIFE INS-H 1.4 PING AN INSURA-H 100 PICC PROPERTY & RMBbn 80 1.2 HANG SENG FINANCIAL INDX
60 1 40
20 0.8
0 0.6
9 9 9 9 9 9 9 9 0 0 0 Jul-09 0 0 0 0 0 0 0 0 1 1 1 Apr-09 Oct-09 Jan-09 Jun-09 Jan-10 - -09 - -09 ------10 - Feb-09 Mar-09 Feb-10 Mar-10 Aug-09 Sep-09 Nov-09 Dec-09 l May-09 n-09 r y n-09 t- n-10 r y a eb pr- u Ju ug ep ov ec a eb pr- J F Ma A Ma J A S Oc N D J F Ma A Ma
Source: Bloomberg, CEIC China Policy In-depth
Policy: Positive Securities Companies Outlook: Positive Performance: 1mth: -23.0%, 3mth: -21.6%, YTD: -28.0%
Key Policy Themes • Policy support for financial market innovation has continued over the past month, with trading in index futures and margin trading both beginning, as well as further support being pledged for the international board, derivatives, forwards and swaps. This was overshadowed, however, by monetary policy tightening, which removed liquidity from the stock market and led to lower trading volumes and fewer new accounts being opened. • Margin trading is likely to be expanded to include funds, securities houses and QFII in the short term to add much needed liquidity to the domestic stock market to support the high profile IPO of Agricultural Bank of China. Initial margin trading volumes are low, with the balance of margin trading and securities lending reaching just 423m yuan as of 14 May, but could rise substantially once institutional investors are allowed into the market. • The hedging quota for index futures has been approved, which means that funds and securities houses may also be allowed to invest in index futures soon, with securities houses likely to get the nod before funds. Daily transaction volumes in futures have increased rapidly but the value of open positions remain low due to the lack of institutional investors. As institutional investors are likely to use the market more for hedging purposes, the number of positions held should increase substantially, which should play a significant role in stabilising the spot market and allowing the futures market to realise its price discovery function. • Preparations for the international board are underway, although the actual timing is likely to be adjusted in line with market conditions. The successful launch of the international board is part and parcel of turning Shanghai into an international financial centre, so it is likely the regulators will push ahead with the introduction, despite governance problems. The first companies likely to list will be large international financials, such as HSBC and Bank of East Asia, as well as Red Chips such as China Mobile.
Major Sector Trends: May marked the introduction of both margin trading and stock index futures, an important step in increasing the sophistication of the domestic market and providing new, diversified investment channels for Chinese investors.
Institutional investors to be The scale of margin trading remains small, with the balance of margin trading and approved for margin securities lending reaching just 423m yuan as of 14 May, but this is largely due to the trading soon fact that only retail investors have been allowed to participate. It is expected that institutional investors, including funds, securities houses and QFII will get access to the market soon, which could increase volumes substantially. Crucially, the increased volumes in the market should provide liquidity to help support the market ahead of the IPO of Agricultural Bank of China. Index futures have had a much more promising start, with the daily turnover of the CSI300 Index Futures reaching 197bn yuan on 14 May, almost four times as much as the daily turnover of the underlying index of 55bn yuan. Amongst other reasons, this is because transactions costs can be more than four times higher when buying shares, while futures are also currently exempt from the stamp tax.
14 Outlook: Positive
The lower transaction costs may have resulted in a switch by investors out of the underlying index into the futures, as the daily turnover value of the index futures has continually risen while the daily turnover value of the underlying index has fallen (see chart below).
Chart 6: Value of daily turnover
300 CSI300 Index CSI300 Index Futures 250
200
150 RMBbn
100
50
0 5/2/2010 5/4/2010 5/6/2010 5/8/2010 4/16/2010 4/18/2010 4/20/2010 4/22/2010 4/24/2010 4/26/2010 4/28/2010 4/30/2010 5/10/2010 5/12/2010
Source: PBOC
Institutional investors With the recent approval of hedging quota for index futures, institutional investors are should support expected to enter the market soon, with securities houses likely to receive approval development of futures before funds. So far, the daily turnover has far exceeded the value of positions held at market the end of each day, largely owing to the dominant presence of retail investors. With institutional investors allowed to participate in the market, the value of positions held will likely increase, which should play a significant role in stabilising the spot market and allowing the futures market to realise its price discovery function. The strong take up and participation in the futures market may lead to more financial market innovation, with regulators likely to take further steps to support the development of the market for derivatives, forwards and swaps, as well as the further development of the bond market and commodities trading markets. Developing the international board in Shanghai will also be a major focus in coming months as part of turning the city into an international financial centre, despite there being no indication on timing at this point. While market liquidity may lead to the date being adjusted in the short term, the main problem over the longer term is likely to be determining how to adjust the regulatory system to meet international standards. It is expected that the first companies to list will be regional financial institutions such as HSBC, Bank of East Asia and Standard Chartered, as well as some Chinese Red Chips such as China Mobile and CNOOC. A major obstacle for the international board is that the currency is not fully exchangeable. That means that only those companies that want to raise RMB to fund domestic operations are likely to seek a listing, and it would generally be a secondary rather than primary listing. Capital controls must be eased as part of the process of RMB internationalisation in order for Shanghai to reach its goal of becoming an international financial centre by 2020. An increasing number of foreign institutions and individuals hold RMB as a result of the wider use of RMB in cross-border trade, but there are few investment channels open to them. Opening the domestic market to foreign RMB holders would likely solve this problem, although bonds are the first investment area likely to be used.
15 China Policy In-depth
Major Companies: Securities companies to Securities companies are likely to benefit substantially from the increased use of futures benefit from financial and margin trading, as well as other general financial innovation, as they will conduct innovation the majority of the trading in these products. Share prices, however, did not perform well over the past month as liquidity was removed from the stock market and new account openings fell, with investors opening 197,000 new A share accounts for the week of 3 May, down 36% from the previous week. It was announced last month that China Galaxy Securities, Shenyin & Wanguo Securities, Orient Securities, China Merchants Securities and Huatai Securities are expected to be the second group of securities houses to be allowed to participate in the margin trading pilot. After the second pilot, the CSRC will expand the number of brokerages in several batches. On 19 March, Guotai Junan Securities, Guosen Securities, Citic Securities, Everbright Securities, Haitong Securities and Guangfa Securities became the first six securities houses to participate in the pilot for margin trading.
Table 5: Securities Sector Monthly Policy DATE Policy and Comments Hedging Quota for Index Futures Approved CFFEX has approved the first group of hedging quotas for index futures, which means that institutional 14-May investors are likely to enter the market soon. The approved hedging quota includes quota for both long and short hedging. As for institutional investors, it is believed that securities houses will be approved to trade before funds, with preference likely given to their proprietary businesses first. New A Share Account Openings Down 36% Investors opened 197,000 new A share accounts last week, down 36% from the previous week, according From Last Week to the China Securities Depository and Clearing Corp. As there were only four trading days last week, on a 12-May pro-rata basis, new account openings declined just over 20%. As of 7 May, the total number of A share accounts in Shanghai and Shenzhen reached 142.8m. As of last week, the number of A share accounts holding active positions was 53,480,900, up 214,600 from the previous week, with the ratio of accounts holding a position increased to 37.45%. It is the fourth straight week that the number of accounts with open positions increased. However, an average of 3,116,500 A share accounts conducted transactions last week, a fall of 232,000 from the previous week. DIAM Receives QFII Approval DIAM received QFII approval from CSRC on 20 April, making it the second institution in 2010 to receive 12-May such approval. This brings the number of QFIIs to 95. The other institution that received QFII approval this year was Ivy Investment Management Company, receiving approval on 8 Feb. CSRC first began QFII approval on 23 May 2003, with UBS and Nomura Securities becoming the first foreign investment institutions to be allowed to invest in the Chinese market. Preparation for International Board Under Preparations by CSRC for launching the international board are under way, according to Li Jiange, Way president of CICC. Short-term stock market fluctuations will affect the time of the launch, but should not 10-May prevent the launch from occurring. The launch of the international board is a top priority for turning Shanghai into an international financial centre, so should also not be derailed by issues relating to the free convertibility of the renminbi. Li said the international board will give priority to red chips wanting to list domestically, with several red-chip enterprises currently preparing for domestic listings. Approval on Foreign Exchange Quotas for Eight funds have received QDII foreign exchange quotas since approvals were resumed in March, QDII Resumed compared to just nine companies receiving approval in all of 2009. Currently, 27 fund companies have had 5-May QDII investment quota approved by SAFE, of which 16 are joint venture fund companies New CSRC Committee Established to The 12th Main Board Issuance Examination Committee of CSRC was established yesterday, which will be Oversee IPO Applications in charge of examining and verifying main board IPO applications. According to CSRC Chairman Shang 5-May Fulin, from June 2009 to the end of April 2010, a total of 242 enterprises were approved for IPO and 154 companies had their refinancing plans approved, with the total value of funds raised reaching 618bn yuan. By the end of April, a total of 84 GEM enterprises have been approved to conduct IPOs. In 2009, 56 companies conducted asset restructurings worth 369.35bn yuan, 12 companies improved industry concentration through mergers, while another 12 companies participated in overseas acquisitions worth 53.1bn yuan.
Source: FCI
16 Outlook: Positive
Table 6: Securities Sector Monthly Policy DATE Policy and Comments Increased Access by Foreign RMB Funds to On Friday, Fang Xinghai, director of Financial Service Office of Shanghai City said that the listing rules for Domestic Market the international board of Shanghai Stock Exchange will be completed by end-2010, while Shanghai is also 4-May considering easing capital controls to allow investors that hold RMB overseas to invest in the domestic capital markets. PBOC to Accelerate Financial Market In 2010, PBOC will accelerate financial market innovation and stabilise stock market operations, according Innovation to its 2009 report on the development of the financial markets. China’s financial market will see certain 29-Apr fluctuations in 2010 as the scale of financing expands, but financial controls should be used to avoid sharp swings in the market, with support for both economic development and financial stability taken into consideration. The report says that in 2010, China will expand the pilot for cross-border trade yuan settlement, further develop the trading and settlement systems at the Shanghai Gold Exchange and it will expand the RMB forex spot market into derivatives, forwards and swaps. Regulators Define Rules for Consolidation The CSRC and MOF have released details relating to the applications for IPOs on GEM submitted by Prior IPO on GEM merged enterprises. For those enterprises that had different controlling shareholders before the merger, the 27-Apr regulator has outlined listing requirements into three categories, with listing requirements being stricter depending on the size of acquisition target relative to the new company in terms of income, assets or turnover. In the situation where the two companies that were merged had the same parent, in order to IPO, the parent must have controlled the two companies for at least one year. The regulator does not recognise entrusted shareholders as being controlled by the same shareholder. Stock Index Future Details for Securities CSRC has released guidelines for securities houses and funds to participate in stock index futures Houses and Funds transactions, which clearly states that securities houses and funds should only use stock index futures for 26-Apr hedging purposes. Funds deposited in security deposit accounts should be fully deducted from the company’s net capital, and securities houses and funds must also set aside reserves of 30% against the value of stock index futures. The guideline also confirmed the details from the original draft that at the end of each trading day, the long holdings of stock index futures should not exceed 10% of a fund’s net assets. It also says that equity, hybrid and capital-preservation funds can participate in stock index futures, while bond and currency funds cannot. Second List for Margin Trading Pilot May be China Galaxy Securities, Shenyin & Wanguo Securities, Orient Securities, China Merchants Securities and Released in May Huatai Securities are expected to comprise the second group of securities houses that will participate in the 19-Apr margin trading pilot. After the second pilot, the CSRC will expand the number of brokerages in several batches. On 19 March, Guotai Junan, Guosen, Citic, Everbright, Haitong and Guangfa Securities became the first six securities houses to participate in the pilot for margin trading. More Open to Foreign Investors The State Council will allow eligible foreign-invested companies to IPO on the domestic market and issue 14-Apr debt in renminbi. IPO approval for foreign-funded companies is likely to be strict, given their expected size and the fact that there is currently significant fundraising pressure on the domestic market already. By comparison, it is more likely that foreign participation in the domestic RMB bond market will be expanded more quickly. It is unlikely that the pilot for using foreign investment to establish guarantee companies for SMEs will be accelerated, given the underdeveloped state of the industry in China. New Regulations for Index Futures, Margin Policies and regulations allowing securities houses, fund management companies and QFII to invest in Trading Expected stock index futures will be gradually released soon. CSRC is also now in talks with CBRC to allow 13-Apr commercial banks to conduct special settlement business for stock index futures. The discussion draft for guidelines on QFII to invest in stock index futures has also been written, but there are still many disputes over the specific investment quota. Previously, NSSF chairman Dai Xianglong said that NSSF is willing to invest in stock index futures, but will do so through qualified NSSF managers rather than direct participation. Furthermore, the margin trading department of CSRC is in discussions with the fund regulation department regarding allowing funds to participate in margin trading, according to Nie Qingping, director of margin trading at CSRC. Nie stated that China will establish a mechanism by which securities held by funds will become the main source of securities financing in the future. It is difficult for securities houses to expand the scale of their margin trading business based on their own capital and securities. The current size of the market is only about 70m yuan. Subsidiaries of Main Board Listed CSRC has allowed domestic companies listed on the main board to split out subsidiaries and IPO them on Companies to List on GEM GEM once six preconditions are met. They include: funds raised by the parent when listing on the main 13-Apr board cannot be invested in the subsidiary which will be listed on GEM; the subsidiary has been profitable for three years; the subsidiary and the parent cannot compete in any business sector; the shareholders of the listed parent and related parties cannot have connected transactions with the subsidiary; the net profit of the subsidiary is less than 50% of that of the listed parent company; the net assets of the subsidiary must be less than 30% of that of the listed parent; and the senior management and related parties of the listed parent hold less than 10% of the shares of the subsidiary to be listed. Source: FCI
17 First China Invest Policy Sector Review
Market cap Perf Sales Securities m Price 1 mth 3 mth 12 mth YTD Price/ Book Price/ Sales Div Yield Curr Yr PE Next Yr PE Op. Margin Growth RoE 600030 CH CITIC SECURITIES CO-A 129,427 19.5 -32.6 -28.6 -25.2 -38.6 2.0 5.2 2.6 13.4 12.1 54.8 22.0 15.4 600837 CH HAITONG SECURITIES CO LTD-A 87,379 10.6 -34.4 -38.9 -25.4 -44.7 2.0 7.4 0.9 16.4 14.4 51.6 39.7 11.1 000776 CH GF SECURITIES CO LTD-A 77,443 30.9 4.8 #N/A N/A 6.5 17.9 16.6 61.5 #N/A N/A #N/A N/A 601688 CH HUATAI SECURITIES CO LTD-A 83,496 14.9 5.2 7.0 #N/A N/A 19.6 15.7 57.3 46.2 33.0 600999 CH CHINA MERCHANTS SECURITIES-A 73,108 20.4 -27.2 -30.1 -30.6 3.2 6.4 #N/A N/A 19.9 17.1 49.0 101.3 24.4 601788 CH EVERBRIGHT SECURITIE CO -A 54,722 16.0 -39.2 -39.7 -37.3 2.4 8.1 6.7 18.2 15.9 66.2 61.6 17.1 000783 CH CHANGJIANG SECURITIES CO L-A 25,512 11.8 -29.1 -33.6 -16.5 -39.1 2.7 6.0 0.9 16.5 15.5 54.2 54.5 20.0 000728 CH GUOYUAN SECURITIES CO LTD-A 25,160 12.8 -26.7 -30.0 -22.3 -39.9 1.7 3.9 20.5 18.8 61.1 60.0 10.4 600369 CH SOUTHWEST SECURITIES CO LT-A 26,064 13.7 -17.3 -18.1 -5.8 -27.9 5.6 11.5 #N/A N/A 28.7 24.2 60.4 000562 CH HONG YUAN SECURITIES CO LT-A 21,947 15.0 -27.9 -30.1 -24.4 -36.9 3.2 6.6 0.7 18.1 16.4 52.4 71.8 20.0 165 HK CHINA EVERBRIGHT LTD 24,334 17.4 -16.8 -4.7 -0.6 -9.2 1.3 47.1 2.2 13.9 11.1 30.0 -45.3 27.8 601099 CH PACIFIC SECURITIES CO/THE-A 18,355 12.2 -28.7 -24.9 -23.2 -32.9 9.9 21.3 #N/A N/A 46.4 43.9 46.2 25.6 000686 CH NORTHEAST SECURITIES CO LT-A 13,547 21.2 -37.1 -37.5 -15.2 -44.8 4.2 6.1 2.0 14.7 13.6 59.5 62.1 34.4 600109 CH SINOLINK SECURITIES CO LTD-A 14,844 14.8 -29.9 -27.4 -18.0 -38.6 5.5 9.6 0.4 27.2 23.3 42.9 -2.0 21.7 218 HK SHENYIN WANGUO HK LTD 1,542 3.3 -17.0 -18.4 -21.7 -16.2 1.7 4.7 0.9 11.1 8.1 22.8 78.0 7.6 Average 45,125 15.6 -28.0 -27.8 -18.0 -33.6 3.7 11.3 2.5 20.2 17.8 51.3 45.8 20.7
New A Share Accounts
2.5 800
700 2
600 CITIC SECURITI-A HAITONG SECURI-A 500 1.5 CHANGJIANG SEC-A SZ CSI300 FINANCIAL INDX
400
1 300
200 0.5
100
0 0 Jul-09 Apr-09 Apr-10 Oct-09 Jan-09 Jun-09 Jan-10 Feb-09 Mar-09 Feb-10 Mar-10 Aug-09 Sep-09 Nov-09 Dec-09 May-09 May-10 Jul-09 Apr-09 Apr-10 Oct-09 Jan-09 Jun-09 Jan-10 Feb-09 Mar-09 Feb-10 Mar-10 Aug-09 Sep-09 Nov-09 Dec-09 May-09 May-10
Source: Bloomberg, CEIC Research: First China Invest Head of Research Miranda Carr Research/Analysts [email protected] +44 20 7024 4650 Roy Zhang Jack Zhang Sherry Wang Sky Zhao Financials Analyst Oliver Barron Heather Ye Tony Chen Sam Huang Tim Gucoal [email protected] +44 20 7024 4651 Sara Tan Darwin Hao Joseph Wu Kenny Tong Head of Beijing Henry Deng Kiki Zheng Johnson Li Peter Gao David Jiang Kathy Song Yue Wu Brian Sun Eric Xie Global Trading: NSBO Co-Head of Equities Co-Head of Equities Chief Economist Richard Abrahams +44 20 7024 4602 Laurie Pinto +44 20 7024 4666 James Stewart +44 20 7024 4652 [email protected] [email protected] [email protected] Sales Sales Trading Michael Bassett +44 20 7024 4618 David McCulloch +44 20 7024 4624 Andrew Costain +44 20 7024 4615 [email protected] [email protected] [email protected] Jérôme Bruneau +44 20 7024 4653 Susan McKenzie +44 20 7024 4603 Bernie Davis +44 20 7024 4617 [email protected] [email protected] [email protected] Simone Chinosi +44 20 7024 4625 Robert Morgan-Williams +44 20 7024 4623 Rhodri Griffiths +44 20 7024 4604 [email protected] rmorganwilliams @nsbo.com Mark Howard +44 20 7024 4614 Tarquin Orchard +44 20 7024 4606 Sam Leal +44 20 7024 4619 [email protected] [email protected] Murali Krishna-Murty +44 20 7024 4621 Giles Sarson +44 20 7024 4620 Aleksandra Orywal mkrishnamurty @nsbo.com [email protected] [email protected] +44 20 7024 4622 Stephane Landers +44 20 7024 4605 Damian Taylor [email protected] [email protected] +44 20 7024 4616 Peter Lidblom +44 20 7024 4612 [email protected]
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