Chinese banks may not be taking the beating that their foreign counterparts have suffered due to the US credit crisis, but their share prices have recently been falling.
Although Chinese lenders have nowhere near the same amount of risk exposure to toxic bonds, they are suffering as a result of the slump in the nation’s property sector.
Shares of China Merchants Bank slumped more than 27% over the past month, while Industrial and Commercial Bank of China also dropped 7% during the same period.
David Cui, head of China equity research & strategy of Merrill Lynch, said: ‘We strongly urge investors to avoid the financial and property sectors.’
Properties prices in various major cities are casting a shadow over the performance of China’s banking sector. The less than rosy outlook for the Chinese economy, which could be dragged down by the decline in exports to the United States and Europe, is also increasing concerns.
So far, bank profitability has been largely locked in by the spread between the lending and deposit rates. The latest reduction in interest rates should make little difference to banks’ earnings, because both the lending and deposit rates were reduced by the same amount.
However, few economists expected the cut of 27 basis points in the lending rate to encourage many more people to borrow at a time when business environment deteriorated.