China's Stocks, Bonds May Fall as Banks Told to Raise Reserves
June 19 (Bloomberg) -- China's stocks and bonds may fall after the government ordered banks to increase reserves to help curb an investment boom in real estate and factories in the world's fastest-growing major economy.
The People's Bank of China last week raised the required reserve ratio for commercial lenders by 0.5 percentage point, effective July 5, to 8 percent. The first increase in the ratio since April 2004 may help soak up money supply, leaving less available for investment.
``Stocks and bonds will probably get a hit because the tightening measure will slow growth and hence company earnings,' said Lu Wenlei, a fixed-income analyst in Shanghai at Shenyin Wanguo Research and Consulting Co., a unit of Shenyin & Wanguo Securities Co., China's third-biggest brokerage by assets. ``For bonds, concern will increase that there will be a shortage of funds and that will push up yields further.'
Premier Wen Jiabao is stepping up efforts to slow an economy that grew 10.3 percent in the first quarter as the investment boom left manufacturers saddled with excess capacity. A buildup of funds in the financial system has encouraged banks to lend to investment projects, leading to overcapacity and falling profits in some industries. That could cause bad loans to rise, the central bank has said.
The move comes less than two months after the bank raised interest rates for the first time since October 2004.
Central bank Governor Zhou Xiaochuan last week told local governments and banks to limit lending. Increasing banks' reserves may help reduce credit to companies, slowing their expansion. The increased reserve ratio will reduce money that banks have available for lending by 150 billion yuan, according to the central bank.
Real Estate
Investment in real-estate development, which accounts for almost 25 percent of total investment, rose 21.8 percent in the first five months from a year earlier after climbing 21.3 percent through April.
China's banking regulator said May 25 that lenders should tighten credit to real-estate developers, responding to a directive from the State Council, China's de facto Cabinet, to rein in property-price gains and speculation.
The tightening in lending echoed the government's previous announcement of measures to cool surging home prices on May 17 including raising the minimum deposit for larger apartments, adjusting tax policies and restricting land for expensive housing.
Shares of Chinese property developers including China Vanke Co. may fall today. Stock of China Vanke, the country's largest publicly traded developer rose 4.5 percent on Friday to close at 5.57 yuan in Shenzhen. The shares have risen 29 percent this year compared with 46 percent of gain in the Shenzhen Composite Index.
Bank Shares
The increase in the reserve ratio will tighten liquidity of commercial banks and lead to a decline in gains on lending charges. It may also result in more bad loans.
China's banks remain vulnerable to an economic slowdown although ``significant progress' has been made in carving out their bad loans, Fitch Ratings said in a report on May 30.
Chinese lenders, from the four biggest state-owned banks to city commercial banks and rural cooperatives, had a combined $206 billion of non-performing loans and $270 billion of others that could go bad, Fitch said.
Shares of China Merchants Bank Co., the biggest publicly traded mainland lender, rose 1.99 percent to close at 7.16 yuan in Shanghai on Friday. The stock has risen 4 percent this year. China Minsheng Banking Corp., the nation's first privately controlled lender, advanced 3.06 percent to close at 4.04 yuan on Friday in Shanghai. It has risen 39 percent this year.
Bond Retreat
China's government bonds may also retreat as central bank's announcement will increase the cost for investors to buy government debt with borrowed funds.
The yield on China's benchmark 10-year bond rose 1 basis point, or 0.01 percentage point, to close at 3.08 percent at the Shanghai Stock Exchange on Friday.
The price of the 2.8 percent note due March 2016 rose 0.06, or 06 yuan per 1,000 yuan face amount, to 97.67. Bond yields move inversely to prices.
Earlier this month, Governor Zhou said that credit-fueled investment may stoke inflation and create asset bubbles.
The bank will increase open-market operations, which include selling bills in the inter-bank market to soak up liquidity, Zhou said on Thursday.
To contact the reporters on this story:
Jianguo Jiang in Shanghai at jjiang@bloomberg.net;
Tian Ying in Beijing on ytian@bloomberg.net
Last Updated: June 18, 2006 20:31 EDT
