5 min read

Asia Tea Time - Cup 33 ☕

This week, I cover the new rules for Chinese banks, the Indian market, and Seoul Metro.

Macro in Asia

New rules for China banks to improve risk management

China’s financial regulator has signalled its intention to tighten controls over the country’s financial sector at a five-yearly policy conference. 

President Xi Jinping and the Chinese government has been determined to deleverage the country’s huge real estate sector.

Why it’s happening

  • So, China’s property sector has a huge debt problem and banks are intimately tied to this issue via loans to developers. 
  • In fact, Goldman Sachs estimates that up to RMB 1.9 trillion (US$260 billion) of property loans in China could turn sour – not exactly great for China’s banks, who are the main financiers of developers.
  • China’s big banks – being the largest lenders in the economy – play a crucial role in doling out loans and credit. Therefore, the government likes to have tight oversight of them.

Why it matters

  • China’s four large state-owned banks are some of the biggest in the world, by total assets and also by market capitalisation.
  • However, they’ve been weighed down recently by non-performing loans (NPLs) – basically instances where a loan isn’t paid back.
  • It’s been pretty ugly. Total NPLs from the “Big Four” reached RMB 1.2 trillion in the first six months of 2023 – that number was up 7.6% from the end of 2022. 

What’s next?

  • Watch out for more “crackdowns” and “anti-graft” operations on the financial sector from the Chinese government as it tries to mould the financial sector into one that’s more tightly controlled and regulated.

Tim’s Take 

  • China’s big four banks – Agricultural Bank of China, Industrial & Commercial Bank of China, China Construction Bank, and Bank of China – have always been front and centre in the country’s banking sector.
  • More commonly referred to by their acronyms of ABC, ICBC, CCB and BOC, respectively, they basically control the levers of credit in the world’s second-largest economy.
However, they’ve been absolutely horrific investments over the long term. They’re known for paying generous dividends out to shareholders (indeed some are offering a dividend yield of 7-8% right now).

That doesn’t mask the fact that many of their share prices are trading way below where they were 15 or 16 years ago. For example, ICBC’s Hong Kong-listed stock is trading at HK$3.81, below its HK$6.50 it was trading at in December 2009.

For much of the following decade and a half, these banks’ stock prices have traded significantly below their book value (known as price-to-book or “PB” in industry parlance).

The ultimate reason for the poor performance? Well, investors have long realised that banks are used as a tool of the Chinese government’s monetary of fiscal policy.
  • If they say “jump”, the banks have to jump – no questions asked. One of the greatest lines from the recent financial sector conference was that these new capital rules would help banks and allow them to “better serve the economy”. That’s been a great reason to avoid them.
  • Shareholders at these institutions have no say and given their tight state control, they’ve basically been a massive red flag for investors who are interested in China stocks. 
  • Add in the spectre of a property crisis in China and these banks look as unappetising as ever in terms of a valid long-term investment prospect.

Tim’s money tip of the week

The investment world works in strange ways. Normally, you’d expect high high economic growth (in the GDP sense) to translate into amazing investment returns. But it rarely does.

In fact, there’s no correlation between GDP growth and stock market returns. One country which seems to have bucked that trend is India.

The country’s stock market has had an extraordinary run since the country first started deregulating it economy and developing it capital markets in the early 1990s.

The below chart by the Financial Times highlights just how well the stock benchmark Sensex in India has done for investors over the past 5, 10, 20 and 30 years in terms of annual returns – especially versus the global powerhouse that is the S&P 500 in the US.

We can also see that it’s easily outperformed the China stock market, despite the latter being an economic and trade behemoth over the past two decades.

There’s one catch to Indian markets though – they’re hard to access for foreigners. Typically, to buy stocks directly on the Indian stock exchange, you have to be an Indian citizen. 

So, what’s the best way to invest in India? Using exchange-traded funds (ETFs). I’d say that the best way to get exposure is to buy one of the two big iShares Indian ETFs that BlackRock offers.

The first is the large cap-focused iShares MSCI India ETF (BATS: INDA), which invests in 122 larger companies on the Indian stock market.

The other one is going into the small cap space in India – which is generally viewed as more risky than large cap but also offering potentially higher returns – via the iShares MSCI India Small-Cap ETF (BATS: SMIN). This ETF has exposure to 438 smaller companies in India.    

They’re both a bit more pricey in terms of their annual expense ratios (0.64-0.74%) but it might be worth paying up for if you want broad access to India and its exciting growth prospects.

Do remember, though, that India’s stock market only makes up around 4% of the value of all stocks worldwide…so manage your exposure responsibly!

Story of the week

Commuting is never fun, especially when it’s on overstretched transport networks. In Seoul, the underground train operator – Seoul Metro – if experimenting with removing seats in some carriages in order to transform them into “standing only” ones.

Locals dub the current overcrowded carriages during rush hour as “hell trains” given how crowded it gets.

Indeed, two of the busiest lines in Seoul currently have congestion rates of 193.4% and 164.2%. 

Freeing up a little space by removing seats – 136 square feet to be exact – could help given Seoul’s metro system is one of the busiest in the world, having carried a daily average of 4.3 million passengers last year.