Uncertainty being the natural order of the market, it is little wonder that Greater China investors swayed uneasily all of last week.

Since the beginning of the year, investors have been driven to distraction trying to figure out just which way China's central bank will go in its efforts to squeeze back liquidity.

Chinese shares fell mid-week on rumours that the People's Bank of China may once again hike bank reserve requirements to counter rising inflation. Officials on Friday had to issue a denial to take some panic off the markets.

In these confusing times, the decision of some heavyweight China banks to raise over 273 billion yuan (Dh146.6 billion) jointly from the Hong Kong and mainland bourses is likely to slosh the markets further.

Chinese banks advanced a record 2.5-trillion yuan in new loans last year under a government diktat to prop up the slowing economy. But by going overboard with their lending, the banks strained the balance sheets, prompting them to look for capital replenishment.

Refinancing plans

Also, with the markets flooded with liquidity, the central bank was forced to raise reserve requirement ratio twice this year. To deal with these pressures, China's listed banks have now initiated refinancing plans to meet regulators' capital adequacy requirement, as well as line their coffers. Bank of China, the most aggressive lender last year, was the first off the blocks with its plans. It has got clearance from shareholders to float 40-billion-yuan worth of six-year convertible bonds in the A-share market in Shanghai to beef up capital. It is planning to raise an additional capital by selling new shares in Hong Kong after the bond sale is through on the mainland.

Unprecedented

The market expects BOC to net around 60 billion yuan from the Hong Kong sale. The funds raised from the Shanghai and Hong Kong markets may lift the lender's capital adequacy ratio by nearly 2 per cent in the next two years. With its credit book expanding at over 50 per cent last year, the bank is in dire need of capital, according to reports.

The Industrial & Commercial Bank of China, the world's largest bank by market cap, is also on a money-raising blitz. It will issue up to 25 billion yuan in bonds convertible into its Shanghai-listed shares and seek shareholder approval to issue stock equivalent of up to 20 per cent of equity capital. Last year, it lent an unprecedented 1 trillion yuan, yet managed to retain its ranking as the world's most profitable bank.

China's Bank of Communications, too, is planning a 42-billion-yuan rights issue to perk up its balance sheet. News of this flood of banking shares, being unleashed as part of a colossal fund-raising operation, didn't exactly meet with a rousing welcome last week. There are serious concerns that such huge share sales would drain market liquidity in the mainland. The market is already showing signs of strain after a glut of IPOs last year.

ICBC and China Construction Bank saw their A share prices fall 0.9 per cent and 1.8 per cent respectively last week. Bank of China fell marginally by 0.5 per cent in Shanghai, while its H share fell by a larger margin of 2.3 per cent in Hong Kong.

Limited impact

Bank bigwigs are doing their best to allay fears that hefty share sales would upset the mainland stock market. Some analysts say that the fund-raising plan would have a limited impact, as regulators would have factored this in.

China's publicly traded banks have raised about 150 billion yuan from bond and share sales since the second half of last year to replenish capital. The China Banking Regulatory Commission has also issued smug statements patting the banks for working on a plan to "smoothly raise capital in the markets". The congratulations, however, may have come a little too early. Flush they may be with funds, but China's banking sector has the potential to play havoc with the markets, due to their sheer size.

 

The columnist is a writer based in China.