China’s New Hot Stocks Are State-Owned Banks and Brokers

Customers queue outside a Bank of China Ltd. branch ahead of its opening hours in Hong Kong, China, on Thursday, May 4, 2023. Hundreds of thousands flocked to the city during the Golden Week holiday in early May, triggering hours of waiting at lenders such as Bank of China. Photographer: Lam Yik/Bloomberg (Bloomberg)
Customers queue outside a Bank of China Ltd. branch ahead of its opening hours in Hong Kong, China, on Thursday, May 4, 2023. Hundreds of thousands flocked to the city during the Golden Week holiday in early May, triggering hours of waiting at lenders such as Bank of China. Photographer: Lam Yik/Bloomberg (Bloomberg)

Summary

  • The stocks appear to play catch-up with rally among firms backed by government

While investors in the U.S. are fretting about bank stocks, over in China banks and brokers are among the market’s hottest trades.

China Citic Bank’s shares jumped 10% on Monday in Shanghai, the maximum daily rise permitted in mainland China’s market. Further gains on Tuesday took their increase to 15% this week, leading a rally in the sector that has also included sizable gains in Bank of China, Industrial and Commercial Bank of China and Agricultural Bank of China—all state-owned lenders.

State-owned brokerage China International Capital Corp. rose 10% on Tuesday in Shanghai, while China Galaxy Securities gained 9.3%, Wind data shows. Their Hong Kong-listed shares rose by a smaller amount.

The magnitude and timing of the price increases have left some investors andanalysts in China scratching their heads, since the latest gains came months after the shares of other state-owned enterprises started to surge in price. Chinese state-owned oil producers, telecommunications companies, property developers and chip makers have all jumped in the stock market this year.

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“There may be a spillover effect from the broader state-owned sector rally. Investors looked around and asked—what SOEs can I buy that are not yet overbought?" said Qi Wang, chief executive of MegaTrust Investment, a fund specializing in Chinese A-shares.

The wider rally in the shares of Chinese state-owned companies is partly the result of a speech by the country’s top securities regulator last November, according to analysts. Yi Huiman, chairman of the China Securities Regulatory Commission, encouraged investors to reconsider how they value these shares, calling for a new valuation system “with Chinese characteristics." That followed Chinese leader Xi Jinping’s call in October for state-owned enterprises to “get stronger, do better and grow bigger."

The CSRC chairman’s speech was aimed at boosting the valuation of these companies’ shares, Winnie Wu, chief China equity strategist at Bank of America, wrote in a recent research note. The Shanghai Stock Exchange, which is dominated by large-cap state-owned companies, mapped out a three-year action plan in December, with one of its priorities being to help the valuations of companies owned by the central government to “return to appropriate levels."

China’s four biggest banks reported slower net profits last year, and their quarterly profits rose by low single-digits in percentage terms during the first quarter. But after the recent rally, their stock prices are now eclipsing the performance of the wider market. Bank of China’s shares are up more than 44% since the start of the year, while the shares of the three other largest banks are all up by double-digits. China’s benchmark Shanghai Composite Index is around 9% higher.

Others pointed to the improving earnings outlook for Chinese banks after three lenders cut deposit rates last week, a move that will bolster their margins. China Zheshang Bank, Hengfeng Bank and China Bohai Bank all reduced the amount they will pay depositors.

The fact that regulators allowed some banks to reduce deposit rates shows that they care about banks’ profitability, said Kinger Lau, chief China equity strategist at Goldman Sachs. “I think that really fits the bill of state-owned enterprise reform generating higher profitability and higher shareholder returns," Mr. Lau said.

The Shanghai Stock Exchange is hosting a seminar designed to encourage the revaluation of central SOEs on May 11. On the same day, the exchange will host a roundtable discussion on new exchange-traded funds that reference an index of state-owned companies.

Demand for these ETFs has helped drive the rally in the shares of state-owned banks, Katherine Lei, an analyst covering China’s banking sector at JPMorgan, wrote in a research note on Tuesday.

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