Investor Relations - China

In the midst of volatile markets, Chinese share prices have remained remarkably resilient, attracting strong inward funds flow. However the prospect of major fund-raising by the large Chinese banks is re-focusing investor attention on the balance between independent shareholder and government ownership in China. The rumour that China Mobile, the largest telecom operator, may take a significant stake in Shanghai Pudong bank, a deal which has no evident commercial logic, merely reminds investors that majority owned government companies can be expected to do 'national service' from time to time. While the fund-raisings are designed to maintain prudent regulatory ratios, fund raising on this scale (Y44bn for Bank of Communications) prompts investors to review holdings.

The concerns are also focused on the micro-level of operations, in particular that risk that banks may be subject to political pressure to offer un-commercial loans. However recent anecdotal research by BAML, based on interviews with loan officers in rural and city bank offices, seems to offer comfort that the incentives at a local level offer a reasonable balance of risk and reward. At a time when even European country risk cannot be taken for granted, perhaps the Chinese banks remain an attractive proposition in 'interesting times'.