Liquid markets

Investors try out unorthodox asset classes; government buys bank stocks


21 Oct 2011
Week in China

With the Shanghai Composite Index down 20% in the last six months, it's enough to make investors want to drown their sorrows with drink.

Some are reaching for the bottle in a different way, reports Chengdu Business Daily. Last month, the Sichuan United Liquor Exchange was launched, the first nationwide spot-trading exchange for alcoholic drinks. Within 20 minutes of the opening bell, four major transactions were completed, with 350 tonnes of unblended liquor changing hands.

Investors are also speculating on the price of baijiu, a stiff drink that is a staple at Chinese business dinners, after the launch of an online trading platform operated by the Beijing Equity Exchange to trade baijiu. Industrial and Commercial Bank of China (ICBC) earlier this year also started selling a wealth management product that is backed by baijiu. Investors have the option of being paid returns in cash or in the alcohol itself.

Just as everyone else is jettisoning stock, government buyers are entering the market.

This recent craze for punting on baijiu is not as strange as it sounds - prestigious brands like Moutai and Wuliangye have been rising in value, so you can think of it as the local equivalent of buying Bordeaux wines en primeur (something rich Chinese have also been doing quite a lot of). It's also part of a more general trend of moving out of traditional asset classes after disappointing performances.

But just as everyone else is jettisoning stock, government buyers are entering the market.

The most notable participant is Huijin Investment, a subsidiary of China's sovereign wealth fund, which started purchasing shares in the Big Four banks early last week in a move described by some as a bailout (for more background on Huijin see WiC62).

"Huijin is supporting the share prices of the state-owned banks," one analyst told Bloomberg.

In total, Huijin spent around Rmb197.5 million ($31.1 million), calculates Bloomberg, a tiny amount considering the banks in question have some of the largest market caps in the world.

Despite the small size of the intervention, Huijin's actions seemed to have an immediate effect. In Hong Kong, Agricultural Bank of China's H-shares were up 12.8% the following day. ICBC and Bank of China were up by 6.7% and 7.7% respectively.

The gains helped repair some of the damage caused by short-sellers betting against the sector.

The effect on bank stocks on the domestic exchanges was more lacklustre. Bank of China's A-shares nudged up just 2%, while ICBC was only 1.25% better off. In part that's because bank shares in the domestic market have not fallen as dramatically as their H-share equivalents in Hong Kong, leaving less room for recovery. There is also much more limited short-selling on the mainland (which is only permitted in a small trial programme).

The government has also hinted that it intends to put more of its money into the market, with reports in late September that Rmb10 billion of social security funds could also be released for investment. The social security fund is similar to Huijin in that when it is used to intervene, it is usually seen as an effort by the government to stabilise the market.

Despite this, there is scepticism on whether Huijin's bailout can really have a meaningful effect. Past performance does not point to any definitive outcome: the first time Huijin tried to intervene in the market, just days after Lehman collapsed in 2008, the Shanghai Composite Index rallied strongly for a day, before resuming its decline. When Huijin again bought bank stock in the secondary market in October 2009, the index did move upwards.

Back to the present day, and worries about deeper weakness in the financial system will probably continue to put downward pressure on banking stocks, in spite of Huijin's best efforts.

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