Move seen as policy signal to stabilize prices, restore confidence

BEIJING - Central Huijin Investment Ltd, an arm of China's $300 billion sovereign wealth fund, said that it has started buying shares of the four major State-owned banks to stabilize prices after the A-share market fell to its lowest level in 30 months.

The move, announced on Monday by Central Huijin, the largest shareholder of China's big four banks - Industrial and Commercial Bank of China, Bank of China, China Construction Bank and Agricultural Bank of China - was seen by some analysts as a policy signal to prop up the domestic market and help restore investor confidence.

The company said that the share purchase is aimed at supporting the steady operation and development of the major financial institutions and stabilizing their stock prices, the Xinhua News Agency reported. But the company did not disclose the size of the share purchase.

"The purchase by Central Huijin may trigger a short-term market rally as it indicates that the biggest shareholder of the banks believes that current prices are low enough to buy," said Zhang Qi, a Shanghai-based analyst at Haitong Securities.

"But it's still too early to say that the general market has bottomed out given the weak outlook of the domestic economy and the uncertainties in the global markets."

The benchmark Shanghai Composite Index continued to slump on Monday, closing at 2,344.79 points with merely 40 billion yuan ($6.29 billion) turnover, compared with nearly 200 billion yuan in late March. The Shanghai index has declined 18 percent this year on investor concern over the financial turmoil in Europe and the US.

Property stocks led the fall on declining property prices and investor concern that tight monetary policies will continue. Share prices of the big four banks rose slightly toward the end of trading on the news of Central Huijin's purchase.

"Investors were worried about potential risks in the domestic property market which may threaten the banking system and trigger a similar crisis to the one in the United States in 2008," said Andrew Wong, chief executive of the Hong Kong-based brokerage Lyncean Holdings.

"Therefore, the government may feel that it is necessary to support the share price of banks in order to boost market confidence," he said.

China's financial stocks have been weak amid investor concern of further tightening measures to tame inflation. The growing risks in the country's underground loan market are also haunting the property market and the banking industry.

Optimistic market watchers said that the Shanghai index may find support at the psychologically-important level of 2,300 points with a rebound of the banking stocks likely after recent sharp losses.

The latest purchase by Central Huijin is not the first time that it stabilized the domestic stock market. On Sept 19, 2008, it announced it would buy shares of the four major State-owned banks, a move that boosted the Shanghai index to 2,300 points from 1,900 points within a month. However, the index fell again to 1,664 points a month later.

Some analysts said that Central Huijin's purchase is merely symbolic and the rebound of the market will ultimately depend on the fundamentals, as well as the loosening of monetary policy and capital liquidity.

"We still cannot rule out a further market decline as Central Huijin's move will take time to have an effect," said Zhao Xingjian, chief strategist at China Merchants Securities.

China International Capital Corp (CICC), a leading investment bank, said in a report that the A-share market will remain weak given that inflation will remain high and government policies will stay tight.

The market will also be burdened by the supply of several large initial public offerings, including the $2.1 billion IPO for Sinohydro Group Ltd, CICC said.