The hugely successful initial public offering (IPO) of China Cinda Asset Management Corporation (1359:HKG) highlights two major trends that are likely to continue into 1H14. One is the revival in IPO activity on the Hong Kong Exchange, the other is the sharp rise in disposal of non-performing loans (NPLs) by banks in mainland China. China Cinda now has a treasure chest of $2.5bn in new funds, 60% of which will be used to bid for NPLs.
Chinese banks are facing a number of challenges as the authorities in Beijing seek to crack down on the various excesses of the last few years. This is clearly having an impact on the banks’ performance metrics: as a result, they are in need of capital. In turn, the Hong Kong IPO market has received a boost on the back of this.
The A-shares of listed producers of baijiu (the highly prized and highly priced white liquor) have performed very badly through 2013. Thanks in part to a scandal and in part due to the clampdown on banqueting (and graft) by senior military and government officials, sales and profits have slumped. However, managers of China’s mutual funds, and other institutional investors, have generally maintained their holdings in the listed baijiu companies. Many of the leading baijiu companies are cashed up and are paying out sizable portions of their profits in dividends to shareholders. In essence, the listed baijiu companies look much more like value stocks than growth stocks.
Offshore renminbi (CNH) deposits in Hong Kong rose to record high levels during August. This is partly the result of easier liquidity conditions in the mainland. It may well also be due to the People’s Bank of China’s new policy, which seeks strength, or at least stability, in renminbi vis-à-vis the US dollar.
A sharp increase in write-offs and sales of non-performing loans (NPLs), and strong growth in overdue loans, suggest that asset quality at Chinese banks is a lot worse than official NPL figures imply. The banks need stronger capital bases. This is partly because of the introduction of the Basel III rules and partly because of the banks’ need to grow their businesses in a competitive market place. As a result, a growing number of Chinese banks are looking to raise capital via the Hong Kong stock exchange.
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