Analysis: China's bank share buys may herald slow easing cycle

Tue Oct 11, 2011 3:21am EDT
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By Emily Kaiser, Asia Economics Correspondent

(Reuters) - China's purchases of beaten-down bank shares may be one of several baby steps along an easing path that eventually leads to interest rate cuts.

It will probably be a slow process. Before Beijing reaches for a blunt instrument like interest rates, it may first unwind some of the tightening measures put in place over the past few months to try to prevent lending from getting out of hand.

Options might include suspending initial public offerings, as it did in 2008; easing up on so-called "punitive bills" that banks are sometimes required to buy as a means of restricting the flow of credit; or injecting a bit more money into the economy through regular open market operations.

This is not 2008. China's economic growth looks far more sturdy than it did after the financial crisis struck. But there are a few air pockets, particularly within lending, so a targeted policy response that begins with supporting banks makes sense.

"This is the start of something more concerted from Beijing," said Hong Hao, a global equity strategist at China International Capital Corp in Beijing. "Somebody had to pull the trigger at some point. But it's very difficult to say when the central bank will loosen monetary policy."

The initial share purchases by a unit of China's sovereign wealth fund on Monday were relatively small, according to two of the banks that received investment.

The message to the market was clear: Beijing is prepared to stand behind the banks in times of trouble. That in turn sends an important signal for the broader economy that China will ensure lending does not dry up.

"It also shows that China's government is behind the banks and believes in the banks," said Mike Werner, an analyst with Sanford Bernstein. "They wouldn't be doing this if, for instance, they were concerned about these banks having to raise capital in the near future on an industry-wide basis."   Continued...

<p>A man works in the trading room of Shanghai Stock Exchange during a ceremony marking the initial public offering of Industrial &amp; Commercial Bank of China (ICBC) October 27, 2006. REUTERS/ Nir Elias</p>