22 October 2016
Even after the sale, Huijin still owns 45.89 percent of ICBC's A shares. Photo: Bloomberg
Even after the sale, Huijin still owns 45.89 percent of ICBC's A shares. Photo: Bloomberg

Market correction may present an opportunity for investors

Central Huijin Investment Ltd., a Chinese state-owned investment firm, offloaded 300 million A shares of Industrial & Commercial Bank of China Ltd. at an average price of 5.43 yuan each and 280 million China Construction Bank Corp. shares at 6.81 yuan apiece on Tuesday.

The sales reduced the sovereign wealth fund’s holding of ICBC’s A shares to 45.89 percent from 46 percent, the filings show.

Its stake in CCB’s A shares dropped to 2.14 percent from 5.05 percent.

The block trades stirred up market speculation about whether Huijin had chosen to take profits in light of the high valuation of mainland banking stocks.

Another possibility is that it sold down its holdings in anticipation of negative policies that will affect the banking sector in the future.

The Shanghai Composite Index plunged 6.5 percent to close at 4,620 points Thursday, as investors raced for the exits amid widespread rumors following whopping gains so far this year.

The mainland market has gone through several corrections since the market rally started after Shanghai-Hong Kong Stock Connect was launched in November.

It suffered a mini crash of 7.7 percent or 260 points on Jan. 19, triggered by regulators tightening their oversight over margin trading and short selling.

On that occasion, the market recouped its loss within two days.

Therefore, investors should watch closely to see whether the market will rebound swiftly within the next few days.

However, last time, the Chinese authorities and brokerages quickly clarified that the tightening measures were not aimed at pushing down the stock market and would have limited impact.

By contrast, there is no clear clue yet what triggered the dive this time.

Xinhua published a commentary saying the correction will make the equity market healthier.

But it remains questionable whether investor confidence will be restored as quickly as it was last time.

Views are divided on Huijin’s move.

Some believe the share sale kicked off the diversification of ownership of state-run firms, a long-touted reform.

Guijin Securities noted that Huijin hasn’t been allowed to reduce its stake in the country’s biggest banks before, and the sales may pave the way for the government to reduce its control of those banks and open up the ownership of state firms.

In fact, the prospects are limited for the diversification of ownership in the listed state-run banks.

They already have some private investors, and private capital will never replace the government as the biggest shareholder.

Therefore, the focus in banking sector reform should be on relaxing entry thresholds and boosting the growth of private banks.

Also, Huijin increased its holdings of banking stocks over the last few years to bail out the sluggish market.

Financial stocks have outperformed amid the red-hot equity market in recent months.

Therefore, it’s quite sensible for Huijin to offload some shares and take some profit.

Liquidity has determined the direction of the market.

Bad news will be viewed as positive during a bull market, and good news will offer little help in a bad market.

At the moment, the market is overbought, and the news has triggered a market reversal.

Many investors have reaped gains during the market’s surge in recent months, and they keep reminding themselves to take profit at the current high levels.

They raced to the exits when they heard the news of Huijin’s sales, which amounted to only 3.5 billion yuan (US$560 million), compared with the daily turnover of 2 trillion yuan in the mainland markets.

Market sentiment is the key.

If investors still have confidence in Beijing’s support for capital markets, the bull market has further to go.

And each correction offers a good entry opportunity.

Investors should take advantage of this correction and accumulate some stocks at low levels.

This article appeared in the Hong Kong Economic Journal on May 29.

Translation by Julie Zhu

[Chinese version 中文版]

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a columnist at the Hong Kong Economic Journal

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