Shanghai Stock Exchange to roll out index funds, urge banks to enhance investor communications to boost distressed valuations

The Shanghai Stock Exchange is leading efforts to boost the valuation of state-backed banks, urging them to organise more investor relations events, and will ramp up efforts to develop index-based fund products, according to people familiar with the matter, as part of a government campaign to revalue China's listed state-owned enterprises (SOEs).

The exchange's general manager Cai Jianchun outlined the proposals to executives from major publicly traded banks including Industrial and Commercial Bank of China (ICBC) and China Construction Bank at a closed-door seminar on Wednesday, said the people who were briefed about the conference. Lifting the valuation of Chinese banks, which trade at a significant discount to the book value on average, was one of the exchange's key tasks this year, the people said, citing Cai.

Cai also urged banks' board secretaries to be more attentive to investor relations and engage frequently with investors by arranging international investor conferences and events featuring company visits by overseas fund managers, the people said.

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The Shanghai exchange declined to comment.

ICBC, which has the highest market capitalisation among Chinese banks, trades at a 44 per cent discount to its net asset value. Photo: Reuters alt=ICBC, which has the highest market capitalisation among Chinese banks, trades at a 44 per cent discount to its net asset value. Photo: Reuters>

The exchange's proposals may give a further boost to investors who bet on the initiative by Yi Huiman, the chief of China's stock-market regulator, to establish a new methodology for valuing SOE stocks. The trade has overtaken reopening bets as traders' new darlings, sending shares of financials and telecoms - industries dominated by state players - soaring over the past few months.

A gauge of 43 banks on the Shanghai and Shenzhen exchanges has risen 5.3 per cent this year, beating a 1.9 per cent gain in the benchmark CSI 300 Index, according to data provider Shanghai DZH. Shares of the big five state-owned banks, including ICBC, Construction Bank and Bank of China, have climbed at least 16 per cent in Shanghai this year.

Even after the gains, the Chinese banking sector is still the most distressed industry group, trading at an average of 36 per cent discount to the book value, according to Bloomberg data. ICBC, which has the highest market capitalisation, is 44 per cent below its net asset value.

That compares with the average 7 per cent discount for the US banking industry, which is now roiled by a fear of bankruptcies among regional lenders. JPMorgan Chase, the biggest of the 348 American listed banks, commands a 48 per cent premium to its book value, according to Bloomberg data.

The cyclical nature of the banking industry, its social burdens, the industry's risk exposure to the housing market and corporate transparency were highlighted by fund managers as the key reasons for staying underweight on the stocks, the people said, citing a representative from ICBC who spoke at the seminar on Wednesday. The speaker came to the conclusion after ICBC had conversations with more than 100 institutional investors at home and abroad, according to the people.

The Shanghai exchange was closely watching the valuation of SOEs and the valuation issue was important as banks were the core of the financial industry, the people said, quoting Cai, who also dismissed criticism of SOEs' low efficiency mooted by the West.

Cai said boosting banks' valuation was crucial to support China's weak economic recovery as commercial lenders needed to raise money from the stock market to replenish capital to sustain credit growth required by the regulators, according to the people.

Banks could only boost loan growth by 8.7 per cent at most based on their own existing capital, while the government's target is 10 per cent growth, they said.

Profit growth for listed banks slowed to 2.4 per cent in the first quarter, from 7.6 per cent in 2022, according to Guotai Junan Securities, as falling net interest margins, which contribute the bulk of the industry's earnings, crimped profitability.

The net interest margin fell by 16 basis points from the end of 2022 to 1.84 per cent in the first three months of the year after three cutbacks in the prime loan rate - the benchmark borrowing cost set by China's major commercial lenders - last year, the brokerage said.

"Regulatory bodies and exchanges are not supposed to intervene to lift the valuation of public firms, but in China, market stability and market movement of major state-owned companies are seen as political tasks for the regulators," said Ding Haifeng, a consultant at financial consultancy Integrity in Shanghai.

"The exchange officials seem to be focused on better serving the banks in communicating with the market in the hope the efforts help boost the valuation of the stocks."

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2023 South China Morning Post Publishers Ltd. All rights reserved.

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