September 5, 2011 / 9:12 AM / 6 years ago

Breakingviews-Beijing's role in CCB share sale is troubling

(The author is a Reuters Breakingviews columnist. The opinions expressed are her own)

By Wei Gu

HONG KONG, Sept 5 (Reuters Breakingviews) - The mystery buyer Bank of America’s shares in China Construction Bank (601939.SS) may be none other than the Chinese state. The country’s main foreign reserves fund bought the bulk of $8.3 billion shares sold last week, according to the Financial Times. That may give better returns than U.S. government bonds, and probably saved China Construction Bank from an embarrassing share-price fall. But for Beijing to increase its exposure to the banks, and use reserves to buoy up their stock, is not prudent.

Financially speaking, the State Administration of Foreign Exchange and the National Social Security Fund may not have got a bad deal. CCB’s share price in Hong Kong had fallen a quarter in the three months prior to the deal. Based on the price by Sept. 5, the new buyers had already made a 13 percent paper return, while CCB’s 4.5 percent dividend yield is twice what’s offered by the benchmark 10-year U.S. Treasuries.

But a successful investment isn’t the same as a smart one. Stabilising the Hong Kong market, and CCB’s share price, is hardly the best use of the state’s money. The priorities for investing China’s $3.2 trillion in reserves should be safety and liquidity, so that there’s a cushion when China needs to fund imports, stop a run on a bank or counter heavy selling pressure on its currency. Treasury bonds should always find a willing buyer at short notice. The same may not be true of Chinese bank shares.

Beijing should have saved its money, since it may also need to bail out its banks for real later. Big lenders are likely to need $70 billion of external capital in the next five years due to tougher capital requirements, Wu Xiaoling, a former deputy head of the Chinese central bank, said recently. Huijin, the state fund that conducted the last bailout in 2008, for the Agricultural Bank of China, only has $100 billion of registered capital. Besides, increasing the state’s ownership of the banks –- all already controlled by the government -– is a worrying step backwards. Bargain or not, the deal sends a troubling signal.


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-- A Chinese Consortium including the State Administration of Foreign Exchange, the National Social Security Fund, and Citic Securities were among the buyers of an $8.3 billion China Construction Bank stake sold by Bank of America (BAC.N) on Aug. 29, according to the Financial Times.

-- SAFE, which manages the bulk of China’s $3.2 billion in foreign reserves, used Hopu Capital, the Beijing investment firm established by former Goldman Sachs banker Fang Fenglei, to mask its participation. Singapore state fund Temasek [TEM.UL] was also a buyer, said people familiar with the situation.

-- The investors bought 13.1 billion of CCB’s Hong Kong listed shares for HK$4.93 each, an 11 percent discount to the stock’s Aug. 29 closing price of HK$5.55. The deal is expected to close in the third quarter. CCB shares traded at $5.59 on Sept. 5.

    -- Graphic: CCB-BofA timeline:


    Too shrewd? [ID:nL5E7JU0X6]

    -- For previous columns by the author, Reuters customers can -- For previous columns by the author, Reuters customers can click on [GU/]

    (Editing by John Foley and David Evans)

    (( Keywords: BREAKINGVIEWS CCB/

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