Why Chinas Banking Stock is Likely to Fall Further

Published By : 03 Sep 2015 | Published By : QYRESEARCH

The most prominent state-owned banks in China reported a modest growth in earnings during the first half, coupled with another spike in bad loans. 


It is not surprising to note a rise in bad loan, given the economic slowdown in the country. However, negative factors have not until now fully reflected in the lenders’ share prices. 


Against the backdrop of economic slowdown, sell-off began only in mid-June and took pace during the following months. While, earlier the Chinese stock market was crowded by individual investors, they rushed to sell-off there shares amid a speculative frenzy. 


The continuous fall in equity prices will lead to huge losses especially impacting the highly-leveraged investors mostly constituting of corporates and middle-class individuals. 


The market crash will certainly impact the consumption and investment demand. The effect of the negative wealth will be gradually felt over the next 6 to 12 months. This will be also reflected in the balance sheets and earnings of mainland banks. 


To sustain the real economy, the banks might be asked to make sacrifices, under which circumstance the banks will only suffer more. This would further lead to downside of the share prices. 


Investors were earlier preferring financial stocks since they were expecting further reforms. Moreover, not much while ago liberalization of the sector was also expected. 


However, the market is now shrouded with the worries that the prevalent turmoil in equity and currency markets can impede the pace of reforms. 


Hence, the authorities must begin by restoring the market confidence. 


The economic slowdown did not bring much good news for China. MSCI has already taken its decision to postpone the inclusion of A-shares from China into a crucial emerging markets index. The unfathomably high valuation of some of the most prominent names that are being sustained by the state is identified as one of the major reasons behind the decision by MSCI. 

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