The West’s love affair with China’s banking sector ended long ago. Bank of America’s (BAC.NYSE) divestiture of its remaining stake in China Construction Bank (CCB; 601939.HKG, 0939.SHA) worth US$1.47 billion on Tuesday just punctuated that era with a period. Firms such as Merrill Lynch (which bought a nearly 10% stake in CCB before it became part of BoA in 2008) rushed into Chinese IPOs in the mid-2000s, only to be thoroughly disappointed with access to the mainland financial market thereafter. They have been jumping ship ever since. Goldman Sachs (GS.NYSE) sold off its last stake in Industrial and Commercial Bank of China (601398.HKG, 0398.SHA) for US$1.1 billion in late May. Goldman’s relatively small selloff didn’t have a long-term effect on share price. Neither will BoA’s, which constituted a fragment of CCB’s US$1.5 trillion market cap. Furthermore, investors have been expecting BoA to clear up the overhang. “I don’t see material impact,” said one analyst who was not permitted to speak with the press. “People have always been expecting these strategic investors … to sell down the road.” Investors have other reasons to be cautious on CCB. Late last month, the bank reported the slowest rate of growth in five quarters as it deals with lower lending demand and rising defaults. Not the best time to buy in.
Foreign adventures still a dream for smaller carriers
Air China (AIRC.LON, 601111.SHA, 0753.HKG), China Southern (ZHN.NYSE, 600029.SHA, 1055.HKG) and China Eastern (CEA.NYSE, 600115.SHA, 0670.HKG) dominate the best air routes out of China. So possible plans by the government to deregulate international air routes for Chinese airlines and allow smaller players a role, as suggested this week by Hainan Airlines (900945.SHA) vice president Wei Hou, could threaten the rosy position of the big three. Presently, only one Chinese airline can operate on one international route, for example Beijing-London, and flagship carrier Air China typically gets the first dibs. That’s a powerful position to hold at a time when Chinese trips overseas are exploding. Still, senior executives at the carriers won’t be having sleepless nights just yet. While the government may “probably” introduce some deregulation soon, the scope will “be very limited and the process is little step by little step,” Zhang Jing, a transport analyst with Phillip Securities in Shanghai, said by email. Furthermore, the impact will only become clearer when specific policies are declared. “So far the negative is very little as the 3-big owns most of the flight resources in China,” said Zhang. For now, she has an “accumulate” rating on Air China and China Eastern and “hold” for China Southern.
The Panama Canal is one of the engineering wonders of the modern world. A US$5.2 billion upgrade and expansion project to accommodate gigantic modern vessels will help it retain its prominence. The expansion also heralds a substantial shift in sea routes between the US and Asia – a vital global trade route. Ships carrying toys, electronics and all manner of goods made in China will now be able to be directed to ports on the US East Coast, reducing the need to transport containers across the country by rail. This is being supported by large investment projects at ports and shipping lanes in places like New York and Baltimore. Analysts at Barclays see this driving a plus-3% incremental increase in total global demand for container shipping capacity in 2015. China Shipping Container Lines (2866.HKG) has been picked as a potential winner. The state-backed firm is set to take delivery of eight 10,000 ton equivalent unit vessels in 2015 – vast carriers that allow for greater cost efficiencies in shipping. The stock is trading at a very low price-to-book ratio “providing significant upside should the industry recover to normal profitability in 2015.” But as with so many mega infrastructure projects delays can be expected which will put back any positive impact for China Shipping.
The IPO market for Chinese stocks abroad remains quiet.