China - subprimed or not?

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Reading Bank of China’s ticker last week was a crash course in China’s stock markets. Towards the end of last week, the bank reported on its sub-prime exposure. On the next trading day, if you were given the two ticker symbols for Bank of China (BOC) and their positions, you’d be hard pressed to guess what BOC’s actual position was. In HK, BOC fell by as much as 5.4% over the course of the trading day*, while in Shanghai, the stock actually rose 1% on a day when the entire market rose 5% overall. What happened?

 

When you look at the numbers that BOC actually put out, it is sobering, but not overly so. BOC’s exposure to sub-prime is about $9.6B, which represents just under 4% of their total securities invested. This means that even if the underlying instruments tank, BOC’s loses will likely be contained to 2-3%, not insurmountable considering BOC’s net profit grew 52% for the first half 2007 over last year. Nevertheless, BOC has set aside just over $140M to cover potential losses. Comparatively, this is quite a bit more than other Chinese banks as ICBC reported last Thursday that its subprime exposure was valued $1.23 billion at the end of June, representing 0.3% of its total securities investment and CCB reported a $1.06 billion exposure as of the end of June, or about 0.1% of the bank's assets of 6.1 trillion yuan.

 

What’s more interesting than the numbers themselves are the news reports that go along with them: most of the local publications noted the subprime exposure, but didn’t focus on it. Bank of China even denied a report by a Chinese publication, Capital Week, that it risks losses of 3.85 billion yuan. Wang Zhaowen, a spokesman for Beijing-based Bank of China, was quoted as saying “The report is groundless and irresponsible.'' So who to believe? And for the Chinese mainland investors, does it even matter?

 

The diverging views are quite common in China today. Domestically, the average Chinese investor who has a bit of money to invest is not really spoilt for choice. While recent rules are starting to allow investors to play in the HK market, most of the options are confined to real estate and the Shanghai stock market. Housing prices in 70 major Chinese cities were up 7.5% in July from a year earlier and the Shanghai Stock Market is up 90% ytd. With returns like that, it’s not difficult to see why money is flooding the markets and the circle continues with new money driving prices up and attracting more new money...

 

We’ll take a look later in the week at the stock price changes in ICBC and CCB after their announcements.

 

 

*For those of you who may not be familiar with China’s markets, A-shares trade only on the mainland and primarily only open to domestic investment. H-shares on the other hand trade on the HK stock market. What is interesting is the varying reads into this news.

 

 

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