Investors are ploughing money into shares of China’s state-run enterprises as they seek a haven from weakness in the Chinese economy and better returns than those offered by the country’s government bond market.
Since the start of April, shares in government-run banks have rocketed with state lenders Bank of China and Industrial and Commercial Bank of China up more than 20 and 10 per cent, respectively, in a rare rally for the country’s bank shares.
More generally, Hong Kong’s Hang Seng Red Chips index of state-run enterprises has climbed about 10 percentage points this year compared with a slight loss for the broader Hang Seng China Enterprises index.
The rally in SOE stocks reflects a hunt for higher dividend yield, analysts said, as a range of China-focused investors lose their appetite for government bond yields that have been driven sharply lower by investors’ flight to safety in the face of economic uncertainty.
“Funds that chase after absolute returns are hunting for stocks with high dividend yield,” said Wang Xin, an analyst with Guosen Securities. Wang added that the recent gains had been fuelled by buying from a wide range of investors, including local punters, foreign investors, insurers and even the banks’ own investment funds.
The shift into bank stocks reflects investors’ appetite for steady and low-risk returns on investment, which is now more easily satisfied by dividend payments from state stocks than Chinese sovereign bonds.
Where easing measures have pushed yields on 10-year Chinese government debt below 3 per cent, the country’s biggest banks, which as pillars of China’s financial system enjoy substantial state support, are expected to pay out yearly dividends of around 6 to 7 per cent, according to estimates from Macquarie Group.
Dexter Hsu, an analyst with Macquarie, said support from Beijing helped ensure steady and relatively high dividend payments by state banks, allowing them to outperform renminbi bond yields while providing investors with a safer play than private companies.
Wang Qi, chief executive at fund manager MegaTrust Investment in Hong Kong, said SOEs had also become “prime candidates for trading” thanks to a years-long deleveraging campaign by Beijing that had helped make their balance sheets healthier.
Top officials have also been talking up the valuations in the state sector. Last year, China Securities Regulatory Commission chair Yi Huiman used a high-profile speech to introduce the phrase “valuation system with Chinese characteristics” that has since become a popular term in the industry when analysing the recent surge in value of SOE stocks. Yi also singled out SOEs and state-run financial firms for their “role as pillars of the economy”.
“There aren’t any specific policies there beyond the slogan,” said Wang, at MegaTrust. These stocks have typically lagged behind the market and “the leading SOEs have been directed by the government to find ways to increase their stock valuation — or at least narrow their valuation discount.”
But while the state sector has found renewed favour, especially among China’s many retail investors, analysts said private sector stocks were more likely to outperform if the economy found its footing.
“We indeed see the government wanting to push valuations higher for SOEs,” said Liu Minyue, investment specialist for Asian and global emerging markets equities at BNP Paribas Asset Management. “But this looks more like a short-term trend for share prices. In the longer term, private companies will still have to be the primary drivers of China’s growth.”
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