Same Old Worries Weighing Down China
06/24/2010 2:50 pm EST
End of the yuan-to-dollar peg? China’s currency to appreciate? That story is so last week!
The stock market action in China over the last couple of days is back to the same old, same old: Worries over global economic growth; worries that China’s government will pull in the reins on lending again; and worries that China’s banks won’t be able to raise all the capital they need.
Nothing much has changed despite Beijing’s move to let its currency appreciate—in a very controlled fashion, amounting almost certainly to no more than 2% to 3% in 2010. If you’re an investor waiting for an end of China’s bear market in stocks, you’re still waiting for a resolution to the same fundamental stories. (For more on the limits to China’s decision to let the yuan fluctuate in price, see this post.)
Chinese stocks fell on June 23 on fears that the government would extend its efforts to stamp out a bubble in real estate prices to the commodities sector. The Shanghai Composite Index fell 0.7% on that day to bring its 2010 year-to-date decline to 22%. News that the government removed export tax rebates on some steel, zinc, and tin products precipitated the drop. Those rebates had been added to help Chinese exporters during the worst days of the global economic crisis. On the news, Goldman Sachs lowered its 12-month target prices for four Chinese steelmakers by as much as 32%.
Today, June 24, Chinese stocks continued their decline, with the drop led by commodity producers such as Aluminum Corporation of China (NYSE: ACH), which fell 0.6%. The market decline was most closely linked to news that US new home sales fell by 33% in May from April to an annual rate of 300,000. That raised fears that the global economy may be slowing and that Chinese commodity producers would see sales decline. Boashan Iron and Steel, for example, fell by 0.5%.
And finally, looming over all of this, is a fear that China’s banks need to raise so much capital that markets will choke on the offerings. Agricultural Bank of China, the last of China’s big banks to go public, disclosed an initial price range for the Hong Kong portion of its $20 billion to $30 billion of HK $2.88 to HK $3.48 a share. That’s lower than many investment bankers had projected. The price works out to 1.55 to 1.79 times 2010 book value. China Construction Bank trades for 2.18 times book value.
Or at least that was the price-to-book ratio on China Construction Bank before it executes the $11 billion rights offer approved by investors on June 24. The offering, which would give current shareholders the right to buy 0.7 shares for every ten they now own, would add as many as 630 shares in Shanghai and 15.7 billion in Hong Kong to the bank’s shares outstanding. The offering would bring total capital raised by China’s four biggest already-public banks this year to $25 billion.
Of all these worries, the doubts about the ability of China’s banks to raise capital will be the first to be resolved. Final pricing on the Agricultural Bank of China IPO is expected on July 16. (For more on why I think this is the most important indicator for China’s stock market right now, see this post.)
Full disclosure: I don’t own shares in any company mentioned in this post.