Agricultural Bank of China Faces Short Selling Pressure Amid Cornerstone Investor Lock-Up Expiration

Strategic Insights -

Investors are increasingly concerned about the expiration next week of the lock-up period for cornerstone investors in Agricultural Bank of China's IPO, prompting a surge in short selling activity. The bank's share price fell by 4.8% to HK$3.98, making it the most shorted stock in Hong Kong yesterday. Temasek Holdings' sale of its stakes in China Construction Bank and Bank of China has also contributed to the market's unease.

Key Takeaways:

  • Agricultural Bank of China's share price fell by 4.8% to HK$3.98, making it the most shorted stock in Hong Kong yesterday.
  • Temasek Holdings sold 5.19 billion shares in Bank of China and 1.5 billion shares in China Construction Bank, with both banks confirming that their operations and co-operation with Temasek have not been affected.
  • Analysts warn that the sale of stakes by cornerstone investors reflects general worries about the balance sheet health of mainland banks, which are becoming choked with bad loans after being forced to extend credit to local government-backed projects.
  • Estimates of non-performing loans in the mainland banking sector vary, but researchers at Standard Chartered estimate the figure could be as high as 6 trillion yuan (HK$7.2 trillion).
  • The People's Bank of China reported that total bank loans to local governments have reached 14.4 trillion yuan.
  • The China Banking Regulatory Commission has warned that 73% of loans to local government investment vehicles were doled out to projects with insufficient cash flows to make their interest payments.
  • Moody's rating agency expressed concerns about how the banks or the Chinese authorities plan to address the problem of non-performing loans.
  • Temasek's sale of stakes in China Construction Bank and Bank of China is seen as part of its portfolio rebalancing, but analysts warn that the sale reflects broader issues with the balance sheets of mainland banks.
  • The mainland's four largest lenders - Agricultural Bank, Bank of China, China Construction Bank, and Industrial and Commercial Bank of China - were recapitalized by government bailouts and IPOs after being choked with bad debts in the mid-1990s.
  • The seven largest mainland banks listed in Hong Kong have raised a total of 940 billion yuan through IPOs and rights issues since 2005.

Statistics:

  • Agricultural Bank of China's share price fell by 4.8% to HK$3.98.
  • Temasek Holdings sold 5.19 billion shares in Bank of China and 1.5 billion shares in China Construction Bank.
  • The sale of stakes by cornerstone investors reflects general worries about the balance sheet health of mainland banks, with estimates of non-performing loans ranging from 400 billion to 500 billion yuan this year.
  • The People's Bank of China reported that total bank loans to local governments have reached 14.4 trillion yuan.
  • The China Banking Regulatory Commission has warned that 73% of loans to local government investment vehicles were doled out to projects with insufficient cash flows to make their interest payments.
  • Moody's rating agency expressed concerns about how the banks or the Chinese authorities plan to address the problem of non-performing loans.

Sources:

  • Victoria Mio, senior portfolio manager at Robeco Group
  • Warren Blight, senior analyst at Keefe, Bruyette & Woods Asia
  • A person familiar with the deal between Temasek and Morgan Stanley
  • Jack Rodman, head of Beijing-based consultancy Global Distressed Solutions
  • Joyce Poon, analyst at GaveKal-Dragonomics
  • A Temasek spokesman
  • Standard Chartered researchers
  • The People's Bank of China
  • The China Banking Regulatory Commission
  • Moody's rating agency
  • Sanford C. Bernstein
  • Singapore Exchange (SGX)