Beijing’s bid to persuade investors to value its giant state-owned enterprises according to their socialist credentials, rather than by conventional western capitalist measures, has flopped after a rally in their shares fizzled this month.
The stocks rose after officials in November called for the creation of a “valuation system with Chinese characteristics” that departed from traditional market methods by recognising the merits of “Communist party corporate governance”.
To bolster the move, government-backed asset managers set up 16 mutual funds, nine of them index-linked, with a mandate to invest in state-owned listed companies.
However, despite initial gains, a number of indices featuring SOEs have since fallen back. The Wind Banking Industry Index, which tracks lenders listed in Shanghai and Shenzhen, has fallen 8 per cent since hitting a one-year high on May 8, with Bank of China losing 13 per cent after hitting a record high.
James Wu, a Shanghai-based fund manager, said he had sold banking stocks this month as he doubted the rally would continue.
“I am not going to hold on to an investment only because the government says it’s worth buying,” said Wu. “There are better investment opportunities than state banks that lack growth potential and independent management.”
The 1,432 state-owned enterprises listed in China have long been seen as a tool of government policy and frequently underperform their peers in the west. Listed banks, all of them state-owned, have seen their price-to-book ratios fall below 0.6 from 1.2 over the past five years, compared with PB ratios of more than one for US banks in that period.
Elsewhere, the Wind State-owned Key Enterprises Concept Index, which tracks 55 major SOEs, has lost 9.2 per cent since hitting a peak early last month. The Hang Seng China Central SOEs Index of state-owned companies listed in Hong Kong has lost 9 per cent since hitting a 15-month high in May. The indices remain up in the year to date.
“Some short-term traders will decide they can ride a quick wave and then try to get out before the winds change,” said Andrew Collier, managing director at Oriental Capital Research in Hong Kong.
“But international investors won’t be convinced because the data for SOEs show they generally have lower return on equity and return on invested capital than private firms.”
At a conference hosted last month by the Shanghai Stock Exchange, its general manager Cai Jianchun said the capital at China’s 42 listed banks meant they could only increase credit supply by under 9 per cent — below the double-digit target set by the government. “Lenders must replenish capital from the capital market,” said Cai, adding that it was an “important task” for the stock exchange to drive up banks’ share prices.
He listed measures including hosting more earnings calls and events targeting international investors and the development of more SOE-focused funds.
But representatives from state banks said they had trouble convincing investors their financial figures were reliable. An official from Industrial and Commercial Bank of China, the world’s largest by assets, said investors had “worries and bias”. Cai responded that long-term asset managers should take a more dividend-driven stockpicking approach as this would favour state banks.
Beijing’s new “valuation system with Chinese characteristics” harks back to the late leader Deng Xiaoping’s coining of the phrase “socialism with Chinese characteristics” in 1982, when he called for an economy that blended market concepts with state planning.
The initiative had come with the government seeking ways to shore up a market and economy still struggling to recover from three years of tough pandemic controls.
Additional reporting by Joe Leahy in Beijing