China tightening seen hurting property, resources firms

HONG KONG: Beijing's surprise decision to increase bank reserve requirements could signal an end to easy and cheap funding, putting pressure on the earnings of Chinese property and resources companies.

Analysts were divided on the impact of the moves on the profit outlook for Chinese banks, but the news damped market sentiment on the sector. Possible equity fundraising by mainland lenders could also weigh on their share prices over the short term.

Stocks of companies in all three sectors fell across the board on Jan 13 after China's central bank on Jan 12 raised bank reserve requirements by 0.5 percentage point effective Jan 18, its strongest step so far towards tightening monetary policy.

"Tightening suggests a slowdown in liquidity and demand ahead, which is not good for the cyclicals, particularly those commodities in which China is the marginal producer -- things like aluminium and iron ore," said Andrew Driscoll, head of resources research at broker CLSA.

The surprise move is the strongest step to date by the People's Bank of China that it is starting to normalise monetary policy from a very loose stance, with an eye to reining in surging asset prices.

"There is no doubt that this will help cool the property market," said Michael Wu, director of Asia-Pacific corporates at Fitch Ratings, referring to the increase in the reserve ratio requirement. "For property investors, it won't be good news, especially in first-tier cities such as Shanghai."

The tightening came amid Beijing's recent campaign to curb runaway property price rises, fearing a looming asset price bubble and rising inflation. If Chinese banks cut back on mortgage lending, this would mean fewer property purchases and, ultimately, lower prices.

China's banking regulator on Jan 13 warned of the risks of excessive borrowing among land developers, and a housing official said property prices in the country's rich coastal cities are too high.

Chinese property stocks were hard hit with China Resources Land down 5%.

Resources stocks also fell on fears of a possible interest rate increase in China.

The prospect of higher interest rates could lift the value of the yuan, which in turn would raise the price of China commodities in dollar terms, making them less competitive in global markets, analysts said.

Shares of Chalco, the country's largest aluminium maker, ended the Hong stock exchanges morning session down 5.97% at HK$9.76 (RM4.21).

Shares of ICBC, the world largest lender by market capitalisation, were down 3.25% in Hong Kong at the midsession close.

The impact on banks could be less extreme than on other sectors, however. The reserve requirement could be a long-term positive for China's biggest lenders as the policy shift may signal a future move to lift interest rates, which would boost bank profits.

In a note on Jan 13, Citi identified China Construction Bank, China Merchants Bank and China Citic Bank as the biggest possible beneficiaries from higher net interest margins.

"The impact of tightening on earnings is actually a positive," said May Yan, China banking analyst at Nomura. "Our house view is there will be three 27 basis point interest rate rises this year, starting from the first quarter." -- Reuters

Continued reserve requirement increases could hurt smaller banks, however, which have less cash on hand and could be forced to cut back on lending, Citi said in its note.

China's policy shift will raise the reserve ratio requirement to 16% for big banks and 14% for smaller financial institutions.

It was highly unlikely the early Chinese domestic tightening would derail the economy or corporate fundamentals, said Jerry Lou, China strategist for Morgan Stanley.

Chinese equities listed in Hong Kong were more sensitive to US tightening than Chinese tightening, he said, adding: "We will watch for signs of U.S. tightening more closely." -- Reuters