Beijing’s attempt to convince investors to value its massive state-owned enterprises based on their socialist credentials, rather than conventional Western capitalist measures, has failed as the rally in their shares faded this month.
The stocks initially rose after officials in November proposed the establishment of a “valuation system with Chinese characteristics” that deviated from traditional market methods by recognizing the merits of “Communist party corporate governance.”
To support this move, government-backed asset managers created 16 mutual funds, nine of which were index-linked, with a mandate to invest in state-owned listed companies.
However, despite the initial gains, several indices featuring state-owned enterprises have since declined. The Wind Banking Industry Index, which tracks lenders listed in Shanghai and Shenzhen, has fallen 8% since reaching a one-year high on May 8, with Bank of China losing 13% after reaching a record high.
Shanghai-based fund manager James Wu, skeptical of the rally’s sustainability, sold banking stocks this month. He expressed his view, stating, “I am not going to hold on to an investment just because the government says it’s worth buying. There are better investment opportunities than state banks that lack growth potential and independent management.”
China’s 1,432 state-owned enterprises listed on the stock market have long been recognized as instruments of government policy and often underperform their counterparts in the West. Over the past five years, listed banks, all of which are state-owned, have seen their price-to-book ratios decrease from 1.2 to below 0.6, while US banks have maintained PB ratios above one during the same period.
In other markets, the Wind State-owned Key Enterprises Concept Index, which tracks 55 major state-owned enterprises, has declined by 9.2% since reaching a peak in early last month. The Hang Seng China Central SOEs Index, which includes state-owned companies listed in Hong Kong, has dropped 9% since reaching a 15-month high in May. However, the indices remain positive year-to-date.
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“Some short-term traders will ride the wave for a quick gain and then try to exit before the tides change,” said Andrew Collier, managing director at Oriental Capital Research in Hong Kong. “But international investors won’t be convinced because the data for state-owned enterprises show that they generally have lower return on equity and return on invested capital compared to private firms.”
During a conference hosted by the Shanghai Stock Exchange, General Manager Cai Jianchun mentioned that the capital of China’s 42 listed banks limited their ability to increase credit supply by less than 9%, which is below the government’s double-digit target. Cai stated, “Lenders must replenish capital from the capital market” and emphasized the importance of driving up banks’ share prices as a key task for the stock exchange. To achieve this, the exchange plans to organize more earnings calls and events targeting international investors, as well as develop more funds focused on state-owned enterprises.
However, representatives from state banks have struggled to convince investors of the reliability of their financial figures. An official from Industrial and Commercial Bank of China, the world’s largest bank by assets, expressed concerns over investor worries and bias. Cai responded by suggesting that long-term asset managers adopt a more dividend-driven stockpicking approach, as this would benefit state banks.
Beijing’s new “valuation system with Chinese characteristics” is reminiscent of former leader Deng Xiaoping’s concept of “socialism with Chinese characteristics” introduced in 1982. It emphasizes the blending of Western market concepts with state planning in the Chinese economy.
This initiative comes as the government seeks ways to strengthen a market and economy still recovering from three years of stringent pandemic controls.
Additional reporting by Joe Leahy in Beijing
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