Analysts say short-selling wave will continue to hit mainland lenders

Chinese banks will have their resilience tested in the next few years as operating conditions turn harsher, Standard & Poor's said in a report on Wednesday, as mainland analysts warned that foreign investors are short-selling China's banking sector.

The S&P report said smaller banks are being hardest hit, providing opportunities for larger and stronger banks to strengthen their dominance by absorbing them.

According to the report, a Chinese-bank credit downturn is likely amid the rising delinquencies and tightening net interest margins.

"Damage to the top banks' balance sheets is about to surface because of a slowdown in China's economy since late 2011 and precarious global economic conditions," said Standard & Poor's credit analyst Ryan Tsang.

He said cheap loans associated with the lending spree resulting from China's stimulus package after the outbreak of the global financial crisis helped the banks contain their credit losses in the past few years, but the damage to their balance sheets is about to surface.

"The trigger is coming from the slowdown in China's economy since late 2011 and precarious global economic conditions as the country's gross domestic product growth has moderated to 7.8 percent in the first half of 2012 from average growth of 9 to 10 percent in the past five years," he said.

Tsang warned that the non-performing loan ratio at Chinese banks is likely to rise in the second half of this year and into the next because of weaker economic growth and a big increase in overdue loans in the first half of this year.

Under such circumstances, S&P believes that many larger and stronger banks will see opportunities to snap up smaller and weaker players to strengthen their market positions.

"Top Chinese banks, particularly national banks and large regional banks, could spearhead massive market-driven consolidation, which proved to be hard to achieve in a buoyant market," said Tsang, adding that the consolidation pace will hinge on the sector's credit downturn's severity.

Because of concerns over Chinese banks' asset quality, foreign investment banks like Credit Suisse, JPMorgan Chase and Co, Deutsche Bank as well as CLSA have downgraded their ratings for Chinese banks recently, causing concerns about whether the Chinese banking sector will be the next target of overseas short-selling institutions.

Experts say foreign investors are waging a round of China short-selling, selecting the banking sector as a breakthrough.

Niu Wenxin, chief editor of China Central Television's finance channel, wrote in an article that mainland bank shares' recent volatility in Hong Kong is a sign that foreign investors are attacking banking shares in hope of sinking the Chinese economy.

"The curtain had been unveiled on the fourth round of China-shorting," wrote Niu in his blog. "Short-sellers are patient. They will rip up China's economy bit by bit and then completely break it."

Niu said this round of China short-selling is different because the Chinese economy is no longer "unassailable" after a round of excessive tightening to rein in inflation and deflate asset bubbles.

Mainland banking shares have been actively traded recently in Hong Kong.

China Minsheng Banking Corp made headlines after its share price's recent roller-coaster ride. Minsheng's shares were down 3.01 percent last week and 9.59 percent in the week ending Aug 31. On Sept 5, its shares sank 3.67 percent amid an exploded trading volume of 213 million shares.

Records released by the Hong Kong Stock Exchange show that Morgan Stanley, Citigroup Inc and Blackrock Inc hourly traded Minsheng shares in quantity.

Morgan Stanley, for example, bought 335,700 Minsheng's H shares on Sept 5 before adding another 2.67 million shares a day later. On Aug 30, however, it sold 28 million shares. Citigroup Inc bought 1.1 million shares on Sept 5, but it sold around 14 million just a day earlier.

First Shanghai Securities strategist Linus Yip Sheung-chi told China Daily that he's not too worried about Chinese banks being the target of short selling. The mainland banking sector is accustomed to short-selling activities, he said.

"The share price of Chinese banks have been dropping since the second quarter of this year, as a result of concerns over their future performance as well as short-selling activities," said Yip.

But he stressed that the current valuation of the Chinese banking sector is at a "historical low" and there is little room for their share price to plunge much further, and therefore it should protect the banks from being attacked by overseas short sellers.

According to a research report released by Deutsche Bank, Chinese banks are operating in an environment that is undergoing an economic slowdown and a sharp fall in corporate profits. Deutsche Bank said it has been cautious about the sector since April 2012.

Given Chinese banks' two rounds of interest rate cuts and deregulation, announced in June and July, Deutsche Bank believes that 2012 is a watershed year for the banks. Along with the macroeconomic uncertainty and the negative effect from impending policy decisions, Chinese banks' net profits after taxes for 2014 are expected to be down 12 percent year-on-year.

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