Sovereign wealth fund moves to boost market

Updated: 2011-10-11 06:39


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BEIJING/SHANGHAI - A unit of China's sovereign wealth fund, Central Huijin Investment Ltd, started to buy more shares in the country's big banks on Monday, in the clearest sign yet that the government is looking to support the country's struggling stock markets.

China's benchmark Shanghai Composite Index has shed nearly 17 percent so far this year, dogged by persistent worries over monetary tightening and concern about momentum in the world's second-biggest economy.

The additional share purchases are the first by Central Huijin since the 2008-2009 financial crisis, and the first officially acknowledged step by Beijing to prop up share prices since the financial crisis.

Huijin, a unit of the $400 billion sovereign wealth fund China Investment Corp and already the biggest shareholder of the country's "Big Four" lenders, began buying more shares in them on Monday, the Xinhua news agency said in a report after the local markets had closed.

"Basically the government is doing something to show their confidence as they feel the current valuation is a bit below a reasonable level," said Victor Wang, a Chinese banking analyst with Macquarie Securities.

"They're showing confidence in the banks, and support from the central government."

Agricultural Bank of China , Industrial and Commercial Bank of China , China Construction Bank Corporation and Bank of China later detailed the purchases, saying Huijin had bought 39.1 million, 14.6 million, 7.4 million and 3.5 million of their Shanghai-listed shares on Monday, respectively.

While those purchases barely changed Huijin's holdings, at 40.04 percent for AgBank, 35.43 percent for ICBC, 57.09 percent for CCB and 67.55 percent for BOC, the four lenders said in statements to the Hong Kong Stock Exchange that Huijin intended to continue to increase its holdings in them over the next year.

More important than specific amounts is the broader signal the government is sending through the purchases, analysts said.

Boost for sentiment

In China's stock market, in which shares tend to fluctuate based more on expectations of the direction of regulations than companies' fundamentals, that signal of support from the government could provide a much-needed boost when trading resumes on Tuesday.

Indeed, the Hang Seng Index in Hong Kong, whose stock market closes later than those in Shanghai and Shenzhen, rose significantly in the last several minutes of trade after the announcement of the Huijin purchases, shedding earlier losses to close flat.

Huijin's purchases of additional shares in the banks have been used before as one way of signalling the government's intent to support the stock market, especially in the wake of the financial crisis in 2008.

The day after Huijin initially announced fresh share purchases in September 2008, the Shanghai index rose 9.5 percent, though it fell back in the following weeks as worries the financial crisis could linger came to the fore.

"This should be a 'policy bottom', meaning no further tightening ... but it's hard to say that it will be a bottom for the index, as we also have many uncertainties, such as inflation data," said Zhang Gang, senior analyst at Central Securities.

"But we can say that it is a signal from the government that it will help to boost the market."

More moves possible

The government also has other means at its disposal for supporting the market, which could dovetail with efforts by other authorities in Asia to blunt the impact of financial problems in the United States and Europe, including countries such as South Korea intervening in their currency markets.

In September, local media reported that China's national pension fund had received approval to buy around 10 billion yuan ($1.6 billion) in the local stock market.

Media reports also said in August that Chinese insurers, largely owned and controlled by the government to varying degrees, had ploughed billions into the local stock market.

Some analysts said the government could also turn to other tools to support share prices should it so choose, including slowing down approvals of new initial public offerings as it has during past market slumps.