CCB: The mystery buyer of Bank of America’s shares in China Construction Bank may be none other than the Chinese state. The country’s main foreign reserves fund bought the bulk of $8.3 billion shares sold last week, according to the Financial Times. That may give better returns than US government bonds, and probably save China Construction Bank from an embarrassing share-price fall. But, for Beijing to raise its exposure to the banks, and use reserves to buoy their stock, is not prudent.
Financially, the State Administration of Foreign Exchange and the National Social Security Fund may not have got a bad deal. CCB’s share price in Hong Kong had fallen a quarter in the three months before the deal. Based on the price by September 5, the new buyers had already made a 13 per cent paper return, while CCB’s 4.5 per cent dividend yield is twice that offered by the benchmark 10-year US Treasuries. But, a successful investment isn’t the same as a smart one. Stabilising the Hong Kong market, and CCB’s share price, is hardly the best use of the state’s money.
The priorities for investing China’s $3.2 trillion in reserves should be safety and liquidity, so that there’s a cushion when China needs to fund imports, stop a run on a bank or counter heavy selling pressure on its currency. Treasury bonds should always find a willing buyer at short notice. This may not be true of Chinese bank shares. Beijing should have saved its money, since it may need to bail out its banks for real, later. Big lenders were likely to need $70 billion of external capital in the next five years due to tougher capital requirements, Wu Xiaoling, a former deputy head of the Chinese central bank, said recently.
Huijin, the state fund that conducted the bailout in 2008 for the Agricultural Bank of China only has $100 billion of registered capital. Besides, increasing the state’s ownership of the banks — all already controlled by the government — is a worrying step backwards. Bargain or not, the deal sends a troubling signal.
