Huijin’s Bank Buyback: Coming To HK?
A liquidity crunch rocking China’s banks has also wreaked havoc on their stocks, prompting their biggest shareholder Central Huijin to step in to try and ease the share sell-off. Huijin so far has limited its buying activity to the Shanghai stock exchange, in what looks like a modestly successful campaign to support shares of big name banks like ICBC (HKEx: 1398; Shanghai: 601398), China Construction Bank (HKEx: 939; Shanghai: 601939) and Bank of China (HKEx: 3988; Shanghai: 601988). Given the success of this modest program, there’s the interesting possibility that Huijin could expand the program to Hong Kong, where H-shares of the same banks have fallen much more steeply.
This kind of buyback is relatively common, and is somewhat equivalent to companies buying back their shares when they think their stock is undervalued. Huijin conducted a similar buyback in April that appeared to have some positive impact. (previous post) The strategy is a good one if it works, since the market value Huijin gains from an extra point or two in a bank’s share price is usually much larger than the millions of dollars it typically spends on a buyback.
Word of the latest buyback first emerged this week, when all 4 of the country’s top state-run lenders announced that Huijin had increased its A-share holdings over the previous week. In all cases the increases were tiny. For example, Agricultural Bank of China (HKEx: 1288; Shanghai: 601288) said Huijin’s holdings in the bank rose to 40.24 percent after the buyback, from 40.23 percent beforehand. (company announcement) All the banks commented further that Huijin would continue its buyback for the next 6 months. (Chinese article)
A quick look at the banks’ share prices appears to show that Huijin’s strategy may be working, in this case reassuring Shanghai investors that Huijin will step in to buy up excess banking stock on the A-share market. ICBC’s stock is down 3 percent over the last month in Shanghai, far less than the 15 percent drop for its H-shares in Hong Kong where there is no buyback. Similarly, China Construction Bank’s shares are down 8 percent over the last month in Shanghai, about half of their 18 percent decline over the same period in Hong Kong.
So the next question becomes: might Huijin expand its buyback program to Hong Kong, and what would that mean for the big banking stocks there? In my view, the likelihood of a Hong Kong buyback seems quite likely, perhaps at around 70 percent. As I’ve stated above, the amount of money that Huijin would have to spend on such a buyback would be miniscule compared with the amount of value it would gain by boosting the banks’ shares.
Of course it’s debatable whether or not such a buyback would halt the slide in the banking shares in Hong Kong. Unlike Shanghai, which is dominated by retail investors who don’t usually have a deep understanding of the stocks they buy, Hong Kong is dominated by large international institutional investors. Those savvier investors might simply ignore a Huijin buyback as a largely empty psychological ploy designed to boost confidence.
That said, the banking stocks are desperately in need of any confidence boosting measure right now, especially if the current liquidity crisis continues. I’ve personally said before that China’s big banks won’t ever fail or even experience any major crises, simply because Beijing won’t allow it. That said, I do think Beijing would prefer not to intervene in the banks’ day-to-day affairs if at all possible, and would see an expanded buyback in Hong Kong as a better way to support their shares until the liquidity current crisis eases.
Bottom line: Central Huijin is likely to extend its bank share buyback to Hong Kong, which could slow or reverse the recent rapid decline there in banking stocks.
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This article was first published in the online edition of the South China Morning Post at www.scmp.com.
