Chinese banks rise to counter global rout

Chinese banks trading on the mainland's exchanges defied a global sell- off on Monday to shield the benchmark indices from a shakeout that arose from the US last Friday.

While concerns that the Federal Reserve will speed up the pace of raising borrowing costs sent global markets plunging, the Shanghai Composite Index dropped only 0.2 per cent at the midday break. Traders were buying Bank of Ningbo and other lenders, putting their stakes in the market's cheapest sector to weather the turmoil.

The bets proved successful. The banking sector remained few of the bright spots on Monday, with Bank of Ningbo and China Citic Bank rising at least 4 per cent. The 22 listed banks on the Shanghai and Shenzhen exchanges are valued at 11.2 times earnings, according to data compiled by Bloomberg. They account for almost a third of the weighting on the Shanghai Composite, the data showed.

Haitong Securities, the No 1 ranked brokerage by the New Fortune magazine, says Chinese banks remain top buys in the following six months as earnings pick up, valuations are low and mutual funds are still underweight in the sector. Citic Securities, the nation's biggest listed brokerage, says the net interest margins, or the rate difference between loans and deposits, will improve amid rising demand for credit and provisions for bad loans will fall on a stabilisation in China's economy.

"Banking stocks are expected to experience a double expan- sion in earnings and valuation," said analysts Xiao Feifei and Ran Yuhang at Citic Securities, which recommends buying mainlandlisted shares of China Merchants Bank, China Construction Bank and Industrial & Commercial Bank of China.

Smaller banks outperformed big rivals on Monday to play catch-up. Bank of Ningbo climbed 4.8 per cent to 21.05 yuan and China Citic Bank rallied 4.7 per cent to 7.77 yuan, adding to gains of at least 18 per cent this year. China Merchants Bank and ICBC were little changed.

Chinese banks trading in the Hong Kong market, in contrast, did not fare well, with all the stocks heading south, as the city's stock market is exposed to overseas flow and sentiment. Among them, Bank of China slid 2.8 per cent and ICBC dropped 1.6 per cent.