Friday, March 06, 2009
As we know, the CIC through Huijin has been buying up shares of the listed state banks (BOC, CCB, ICBC, BOCOM) since late last year in the A share market and possibly the H share market. A colleague of mine asked a very good question? Why? What policy purpose does it serve?
Well, certainly the simple answer is that CIC wants to prop up the prices of the banks shares in both Shanghai and Hong Kong. The effect on the market is not just the direct support, but also expectation effect. It creates a winning trade consistently since traders know that below a certain level, the CIC will intervene.
I think the main reason for this intervention is to prevent a large book loss on the CIC's balance sheet beyond the losses from overseas investment. That's mainly a self serving reason. The public policy reason is that all of the banks will need to recapitalize in the near future due to rapid increases in lending. One way of course is to do so through share issuance. State share holding of these banks would not have to be as diluted the more these shares are "worth" on the market. This is de facto a back channel way for China's foreign exchange reserve to turn into funds for the stimulus, through bank recapitalization.