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Chinese investors are driving a sharp rally in mainland bank stocks listed in Hong Kong, as they hunt for alternatives to the near-record low yields offered by government debt.
The Hong Kong shares of China Construction Bank, Agricultural Bank of China and Industrial and Commercial Bank of China have risen 36 per cent, 33.7 per cent and 25.4 per cent respectively over the past six months, beating the Hang Seng index as mainland Chinese investors pour record amounts of money into the city’s markets.
Chinese insurance companies are helping drive the rally, as they look to high-yielding assets to cover their liabilities. For many investors, banks look like an attractive substitute for government debt which, after a multiyear rally, is offering a yield of around 1.65 per cent on the 10-year note, just above the record low.
In contrast, the Hong Kong shares of the so-called “big four” state-controlled banks — which also includes Bank of China — offer yields ranging from 4.6 per cent to 5.7 per cent, according to LSEG data.
“[Investors] are desperately looking for yield,” said Katherine Lei, JPMorgan’s co-head of Apac banks research. “In China every yield is going down except for the dividend yield.”
The rally comes as investor concerns over banks’ falling net interest margins and non-performing loans have eased, helped by government capital injections into the sector and lower deposit rates. That has heightened their appeal as stable, more defensive investments — a marked change from the depths of China’s property crisis, when concerns over non-performing loans spooked some investors.
“They had a lot more breathing space than the market was giving them credit for,” said Sat Duhra, an Asia ex-Japan portfolio manager at Janus Henderson Investors.
Duhra added that, after meeting some large Chinese banks, he was encouraged by the low price-to-book ratio, high dividend yield and the fact that they were de-risking their businesses.
The banks’ Hong Kong shares are — like many stocks — cheaper than their mainland equivalents, meaning their dividend yields are higher, although recent strong investor demand is starting to close the wide valuation gap that had opened up between the shares’ two listings.
Among big buyers has been China’s second-largest life insurance company, Ping An, which manages an insurance investment fund worth more than Rmb5.7tn ($799.7bn).
It has become the biggest holder of the Hong Kong shares of Agricultural Bank of China, having held almost none as at the end of last year, and the second-biggest owner of H shares in China Construction Bank, having held very few as of last September. It is also the largest shareholder of the H shares of China Merchants Bank and ICBC, and has increased its position in both in recent months.
“Bank stocks have ‘quasi-fixed income’ attributes,” a Ping An spokesperson said in a statement to the Financial Times. “The bank stocks we invested in are of state-level credibility, low volatility and high yield.” Ping An added that it was “managing concentration risk”.
Onshore investors have been quicker than foreign investors to become more confident in the asset quality of the banks. Over the past 12 months, mainland Chinese investors’ holdings of the Hong Kong shares of the big four banks have increased by more than 37 per cent, according to a Financial Times analysis of shareholding data from the Hong Kong stock exchange.
Bank shares are also benefiting from the Chinese government’s efforts to push capital markets reform and encourage longer-term investment. This has included Beijing encouraging buybacks and dividend payouts at state-owned enterprises, and also pushing insurance companies and mutual funds to buy more equities.
“In China the regulator has definitely played a part in pushing companies to maintain or increase dividends,” said Duhra. “When you get government ownership and things are not going well they need the cash.”
At a time when mainland equity markets are flat, amid weak economic growth and uncertainty over US-China relations, banks stocks’ yields and improved financial health have looked even more attractive to many investors.
Trade tensions with the US, amid President Donald Trump’s tariff blitz, have only heightened the appeal of China’s top lenders in the second quarter, said JPMorgan’s Lei.
“It’s very hard to find another sector that, regardless of macro, delivers stable EPS [earnings per share] growth.”
