Chinese shares have hit bear market territory as concerns mount about the country missing its own economic growth target of 7.5% and the ongoing systemic weakness from the credit squeeze in the banking industry. This took markets across the region into the red, with equity futures falling in Hong Kong and China in early trading.
But the People’s Bank of China is not budging on the short-term liquidity shortfall. It has been stingy with injecting money into the system in a bid to curb the expansion of underground lending – so-called shadow banking. Matthew Sherwood, the head of investment market research at Perpetual Ltd told Bloomberg that the Chinese central bank is sacrificing short-term pain for long-term sustainable growth.
The aftershocks of this policy are being felt in the bond market. The Financial Times reports that China Development Bank has pulled a $3.3bn debt offering, adding that analysts believe the tightening could lead to an even sharper deterioration in growth prospects. Standard & Poor’s has joined other rating agencies in warning that an overly aggressive tightening by the central bank could have severe consequences, including putting pressure on the asset quality and profitability of Chinese banks.
The worst hit are the small and medium banks, says the South China Morning Post, which writes that analysts have identified them as the main casualties of rising interbank lending rates. This was reflected in hefty losses on the market: shares in China Minsheng Banking Corp, Industrial Bank and Ping An Bank dropped almost 10% in Shanghai as the Shanghai Composite Index lost 5.3%, its biggest drop in four years.
Banks in the self-administered region have not escaped unscathed by the problems in China’s financial industry. Moody’s says it has lowered the outlook for the island’s banking system to ‘negative’ from ‘stable’ due to its exposure to borrowers in China. Moody’s said that Hong Kong banks are increasingly reliant on the mainland because real interest rates in the city remain low amid surging property prices, and this could contribute to adverse future operating conditions for its banks.
French insurer AXA plans to grow its operations in mainland China through acquisition, with Asia CE Mike Bishop telling the South China Morning Post that the country will be ‘massive’ in the insurance industry in 30 years. Europe’s second-largest insurer agreed in April to buy a 50% share of Shanghai-based Tianping Auto Insurance for USD$630 million, taking on local players who dominate the property and casualty insurance market. The China expansion is part of an overall strategy to raise the amount of business across the region.
AMP shares hit a 10-month low on a profit warning. The company tells investors that it is experiencing increased pressure on insurance claims and policy lapses. The company says payouts for its life insurance were likely to be AUD$32 million higher than expected over the first five months this year in response to a slowing economy and difficulties in getting some policyholders off claims.
ANZ is following through on its plan to raise its profile in Asia. It has officially opened its representative office in Myanmar after securing final approvals. Last December, ANZ became the first Australian bank, and the first OECD bank outside of Japan, to receive approval to establish a presence in Myanmar after the lifting of international sanctions in 2012.
Malaysia’s CIMB has called off plans to buy Philippines bank San Miguel. The deal fell through after the two banks failed to reach agreement on new terms.
Staying with Malaysia, its largest financial services group Maybank has sold a 9% interest in PT Bank Internasional Indonesia for an undisclosed sum. Maybank says the disposal the disposal is in line with the mandatory sell-down requirements by Indonesia’s Financial Services Authority.
Swiss banking group UBS says it has closed its Indian banking unit covering fixed income, forex operations and credit services due to new Indian regulations and stringent capital rules. It will continue its corporate client service business that includes mergers and acquisitions, equities and debt capital market services.
Singapore shares fell for the fourth session in a row, led by palm oil firm Wilmar International, concerns about China’s economy and the expected unwinding of bond buying in the US. Wilmar is one of the world’s largest distributors of palm oil. Burning of palm oil plantations in Indonesia has been named as the culprit for the worst-ever pollution in Singapore last week, with levels reaching an unprecedented 401 on a pollution index which only goes up to 500. OCBC Investment Research downgraded Wilmar to “hold” from “buy”, citing the expected increase in the volatility of the share price.
Directors of Abercrombie & Fitch have fallen out of favour with shareholders, who have voted against their compensation package. The executives, including Mike Jeffries who has been widely lambasted for saying the fashion house is only for ‘cool kids’ i.e. thin and attractive, saw holders of more than three quarters of the company’s shares vote against their packages, according to regulatory filings. Analysts say that Jeffries is one of the 25 most overpaid S&P executive in the past three years. He earned USD$8.16 million for fiscal 2012, exclusive of equity awards. The company has also been fending off a more recent public relations crisis, after selling t-shirts that took pot shots at the love-life of teen idol Taylor Swift.