Chinese bank stocks experienced a significant surge on May 8th, adding approximately $166 billion in market value in a trading frenzy. This rally in financial shares was the fifth consecutive session in which the CSI 300 Financials Index had jumped, and it is expected to hit its highest level since April 2022. This increase in value was primarily led by state-owned lenders such as China Citic Bank Corp and Bank of China, with the latter reaching its limit-up of 10% for the first time since July 2015. The gains were also driven by nationwide lenders lowering deposit rates in a bid to combat shrinking margins, as well as the implementation of new guidelines for bond issuance for state-owned firms.
Investors are drawn to Chinese bank stocks due to their low valuations and attractive dividend yields, despite the weak Q1 results and shrinking net interest margins. As policymakers push for state lenders to provide cheap loans to small businesses and home buyers, Chinese banks have come under pressure to maintain profitability. However, the recent progress on state-owned enterprise reform has boosted investor sentiment and provided a much-needed respite.
This surge in Chinese bank stocks is reminiscent of the 2015 equity bubble, with some banks posting their biggest single-day gains since then. However, this time, investors are being more cautious and looking for value in the stocks rather than blindly chasing momentum. According to Willer Chen, a senior analyst at Forsyth Barr Asia, the “valuation system with Chinese characteristics” is the story here.
Despite the recent gains, Chinese bank stocks are still trading at around 0.6 times the current book value as of Friday, making them an attractive proposition for investors who are willing to take on some risk. However, there are concerns that this rally could be short-lived if policymakers continue to push for cheap loans and if the economic recovery in China falters. As with any investment, it is important to exercise caution and to do your due diligence before committing any funds.