Subsidiary of the lender has taken stakes in big banks, prompting speculation about its long-term motives for taking such a direct role in the market
ZHOU XIN AND XIE YU
UPDATED : Friday, 08 April, 2016, 2:40pm
Investors monitoring share prices at a trading hall in Shenyang in northern China. Photo: Xinhua
After Wutongshu Investment Platform Co was revealed as a major shareholder in several Chinese banks last week, stock prices rallied in China to hail the coming of a new deep-pocketed buyer in the nation’s volatile stock market.
Wutongshu is a wholly-owned subsidiary of China’s State Administration of Foreign Exchange, or SAFE, the government agency that manages the country’s US$3.2 trillion in forex reserves. It in turn is controlled by China’s central bank.
The purchase of the banks’ shares hence fuelled speculation that the ranks of government forces acting to prop up stock prices had just added an all-star member.
Wutongshu was revealed last week to be holding shares in Industrial and Commercial Bank of China, Bank of China, Bank of Communications and the Shanghai Pudong Development Bank.
Two other ventures established by Wutongshu — Beijing Fengshan Investments and Beijing Kunteng Investments — also hold shares in many other listed companies in mainland China.
The disclosed holdings, with a combined value of about 27 billion yuan (HK$32 billion), could be just the tip of the iceberg as they only covered the period ending in 2015. There could be other smaller holdings by the three ventures in other listed companies that did not require public disclosure.
All the three companies are registered at 23 Financial Street in Beijing, the same address where China’s central forex business centre manages the nation’s reserves.
While the central bank had made it very clear that reserves can’t be used for domestic purposes, this ban is fading
DING SHUANG, CHINA ECONOMIST, STANDARD CHARTERED
In short, China’s central bank is now effectively a player in the nation’s stock market, but the technicalities of how and why it is involved is the subject of much conjecture.
The question has triggered heated debate among investors in recent days with speculation about the future use of China’s foreign exchange reserves, Beijing’s handling of the stock market, and even suggestions of a bureaucratic turf war among different regulators and ministries for control of financial affairs.
“It’s very tricky to speculate the exact motives and mechanisms if SAFE itself doesn’t explain,” said Chen Bingcai, a scholar at the Chinese Academy of Governance who has worked with the forex agency.
It was also unclear how the agency was able to invest in the stock market, according to Chen.
“SAFE can’t change its foreign exchange into yuan directly for domestic investment purposes ... a possible arrangement is to entrust dollars to some commercial banks and in return SAFE can get some yuan for investment – but again, it’s just a guess.” SAFE did not reply to requests seeking comment about the investments of its subsidiary.
One explanation is that the move is a hangover from Beijing’s clumsy and failed efforts to stabilise markets during last year’s massive slump in share prices.
The China Securities Finance Corporation, the leader in the latest round of government efforts to shore up the market, borrowed short-term funds from the central bank to buy stocks and when it failed to repay the loans it may have simply given the shares to the central bank, according to Chen Li, managing director of equity research at Credit Suisse.
He estimated the finance corporation borrowed 1.2 trillion yuan from the central bank. The loans were due by the end of 2015 and the corporation couldn’t cash out its bank shares with a 15 to 25 per cent loss, so it just transferred the stock to the creditor as loan collateral. It in turn transferred the assets to SAFE.
“The whole process sounds very complicated, but is feasible with commercial banks acting as an intermediary,” said Chen.
SAFE is becoming more aggressive … it wants to command its own money in its own way
LI JIE, FOREIGN EXCHANGE EXPERT
Another theory is that the central bank is deliberately trying to deepen its involvement in banks, financial institutions and the stock market to increase its influence.
Ding Shuang, chief China economist at Standard Chartered in Hong Kong, said the stock investment by SAFE was in line with the central bank’s strategy of a more direct involvement with Chinese financial institutions and increased unconventional uses of reserves.
“Wutongshu has already invested in China’s policy banks and likewise it is also investing in commercial lenders,” said Ding.
“While the central bank had made it very clear that reserves can’t be used for domestic purposes, this ban is fading.”
The unconventional step by China’s central bank, however, may also indicate an intensified jostle for power with the securities regulatory watchdog and the finance ministry.
The finance ministry and the China Securities Regulatory Commission have agencies exercising control in the stock market, but previously the central bank had none.
“SAFE is becoming more aggressive … it wants to command its own money in its own way” instead of giving to other agencies, said Li Jie, the head of the Foreign Exchange Research Centre at the Central University of Finance and Economics in Beijing.
SAFE was trying to “kill three birds with one stone” by selling off some foreign exchange for yuan to buy into banks, said Li.
First, it supported the yuan exchange rate by selling foreign exchange; second, it helped finance the China Securities Finance Corporation; and third, it may find a new path in managing China’s foreign exchange reserves, which rose US$10 billion in March after months of declines, he added.
Wutongshu, meaning Buttonwood Tree in English, is run by He Jianxiong, the former head of the international department at the central bank and China’s ex-envoy at the International Monetary Fund.
It was incorporated in November 2014 before its US$6.5 billion debut investment in the Silk Road Fund, a pet project by China’s central bank in financing overseas investment.
The names of the two subsidiaries, Fengshan and what was formally known as Huangshan, refer to the Chinese name for phoenix. The image of the mythical bird flying among buttonwood trees is referred to in a famous Chinese poem written about 3,000 years ago and is considered a symbol of hope, harmony and good luck.
China’s stock market, however, offers few opportunities for poetic flights of fancy.
“They can get into the market, but it’s not certain that they’ll be smarter than others,” said Chen at the Chinese Academy of Governance.
http://m.scmp.com/news/china/economy/article/1934649/why-has-chinas-central-bank-become-player-nations-stock-market
