10/12/2011, 00.00
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Beijing buys into “its” banks to prop them up

A sovereign fund buys shares worth 200 million yuan in China’s biggest banks in order to help the banking system stave off the crisis and the loss of confidence. However, the sector’s problems are structural. One of its elements is the apprehended real estate bubble. Meanwhile, hundreds of Chinese companies are going bust and not paying their workers’ salaries.
Beijing (AsiaNews/Agencies) – Beijing is putting 200 million yuan in the nation’s biggest banks. Shares responded positively to the news but expert warn that any benefit might prove short term, that structural changes are in act needed, especially a solution to the country’s real estate bubble and easy financing.

Huijin, part of the mainland's sovereign wealth fund, bought 197 million yuan (US$ 31 million) worth of shares in the mainland's big four lenders, the Industrial and Commercial Bank of China, the Bank of China, the China Construction Bank and the Agricultural Bank of China.

Bank shares suffered most from the overall decline of the Shanghai Composite Index, which is down 16.4 per cent so far this year, after a 14.3 per cent decline in 2010.

Both expert and layman opinion believe that these financial institutions are overexposed with too many bad loans that will be hard to get back because they were given without adequate guarantees or offered to less than profitable businesses.

Still on the markets, the initial reaction to the government’s announcement was positive. China Construction Bank was up 3.9 per cent at the end of the morning session Tuesday, whilst the Industrial and Commercial Bank was 1.5 per cent higher. The Bank of China rose 2.4 per cent and Agricultural Bank added 2.0 per cent.

In Hong Kong, where the four Chinese banks are also listed, the gains were stronger. The Agricultural Bank surged 14.7 per cent by midday, while the Bank of China jumped 8.9 per cent.

However, experts are convinced that the government’s action will have only short-term effects, more symbolic than substantive because the amount of capital would have to be more significant to have a real impact. "Huijin isn't expected to spend a big sum on the banking stocks in future because the [banks'] fundamentals will remain unchanged or [get] even worse."

In 2008, Huijin invested 2.1 billion yuan to buy banking shares as a way to bolster the then-troubled market. But since the banks are state-owned, in time of crisis it is probable that the government will protect the interests of investors at the expense of the banks.

This has negatively affected the value of bank shares, especially in light of the overall crisis of the credit sector, with Western governments also forced to rescue their own financial institutions.

In order to favour economic growth, China has invested heavily in new infrastructures that have not generated expected spinoffs. In the recent past, many loans were made to lending companies who then loaned the capital for higher interest rates. Thus, any problems by end users will have repercussions on the banks, especially at times of crisis.

Many loans were used to invest in real estate on the expectation of rapid capital gains given the quick rise of real estate prices. However, this has led to a bubble with most people priced out of the market. Should there be any steep drop in prices, investors and banks that provided them with the capital are expected to incur in heavy losses.

For this reason, everyone believes that structural changes are needed, including less lending and more money for the population’s real needs in lieu of a never-ending quest for economic growth, which favours speculative bubbles.

In 2011, Zhejiang 228 companies, mostly small and medium-sized enterprises, owed about 76 million yuan in wages to nearly 15,000 workers.

Since many companies kept afloat only thanks to bank loans, they shut down as soon as funding ended. For experts, this is indicative of the perverse side of easy lending, which creates the illusion of wealth.

Eighty-four such enterprises are based in Wenzhou where provincial authorities apparently had to ask the central bank for 60 billion yuan from to help thousands of families in dire needs.
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