China's biggest state-owned banks have lent a combined Rmb1.3tn ($209bn) to the country's margin finance agency in recent weeks to staunch a free-fall in the stock market, casting doubt on whether the recent market rebound is sustainable without government support.
China Securities Finance Corp was established in 2011 to lend to securities brokerages and support margin lending to stock investors. Amid the stock market's dramatic tumble beginning in late June, however, the government has deployed CSF as a conduit for injecting rescue funds into the stock market, writes Gabriel Wildau in Shanghai.
CSF has lent to brokerages to finance their stock investment and has also purchased mutual funds directly. But today's revelations indicate that state support for the stock market is much larger than previously disclosed.
The Shanghai Composite Index has recovered about 15 per cent since its low point on July 10. The magnitude of state support suggests the rally is largely a government-driven phenomenon.
Financial magazine Caijing reported on Friday that the country's sixth-largest lender by assets, China Merchants Bank, provided the largest single loan, at Rmb186bn. The five largest banks — Industrial and Commercial Bank of China, China Construction Bank, Agricultural Bank of China, Bank of China, and Bank of Communications — each provided more than Rmb100bn. In total, 17 banks provided interbank loans worth around Rmb1.3tn through July 13, the magazine reported.
The People's Bank of China had previously said it was "actively assisting" CSF to obtain liquidity through interbank lending, bond issuance, and other methods. The central later confirmed it had provided loans directly to CSF, without specifying an amount.
CSF also recently issued bonds in the interbank market worth Rmb800bn. With the interbank loans, that brings its total war chest to over Rmb2tn, even before direct loans from the central bank are included.
The Caijing report suggests the PBoC is seeking to minimise its direct role in lending to CSF, preferring to rely on commercial banks to provide funds for the stock market rescue.
"I think what the PBoC wants to achieve is like 'Do whatever it takes' as said by (European Central Bank president Mario) Draghi to boost confidence (in the euro), but no need to really print money to buy stocks. They want to do easing, but not this way," said Larry Hu, China economist at Macquarie Securities.
Still, the central bank regularly lends to commercial banks through various mechanisms, so PBoC could have provided extra funds to support commercial banks' loans to CSF.
For the commercial banks, the burden of national service isn't too onerous. Their loans to CSF carry little risk, given CSF's status as a state-owned financial institution, and the return on their loans is "pretty good," Caijing reported.
The Shanghai Composite was up 1.4 per cent through midday on Friday.