Singapore's Temasek faces key tests over China banks

SINGAPORE, July 3 Tue Jul 2, 2013 5:00pm EDT

SINGAPORE, July 3 (Reuters) - Singapore's sovereign investor Temasek Holdings Pte Ltd is coming under pressure to review its large exposure to Chinese banks as the world's second biggest economy is on track for its slowest growth in more than 20 years.

The city-state's AAA-rated wealth fund has poured billions of dollars into the biggest Chinese banks over the past few years including about $2.4 billion in the Industrial and Commercial Bank of China since 2012 alone.

But Chinese banks now face a difficult outlook due to credit tightening and bad loans. Banks suffered an unprecedented cash crunch last month after the Chinese central bank allowed rates to shoot to record highs to punish banks for making risky loans, and to force them to curtail dodgy lending.

The state investor will shed more light on its China strategy when it presents its annual report for the year ended March later this week.

Temasek, which is headed by Ho Ching, the wife of Singapore's prime minister, faces two stark choices - either trim some of its China bank holdings or be patient with China's painful economic and banking transformation to take advantage of a possible recovery after reforms.

"Temasek will have to ride out the short-term restructuring theme. Rather than head for the hills, it won't be out of character for them to take larger stakes should the opportunity arise," said Song Seng Wun, an economist at CIMB.

China accounts for more than a fifth of Temasek's total portfolio valued at S$198 billion ($156.5 billion) in the financial year ending March 2012.

"China faces many structural challenges not just for the banks, but also for the economy," said Sanjay Jain, head of Asian financials equity research at Credit Suisse.

"It is difficult to make a positive case on the banks on a medium term view until the economy has been restructured and is on a sustainable growth path driven by consumption, private sector and services sector."

Temasek, which translates as "sea town" in Malay, was burned by its financial industry exposure in 2008 as stakes in large European and U.S. banks plunged in value due to the turmoil in global markets.

But it has kept 31 percent of its investment portfolio in banks which it feels are strong and can capture emerging market growth, trimming from nearly 40 percent before the financial crisis in 2008.

Despite the cash crunch in China's money markets, the country's four biggest lenders - Bank of China, China Construction Bank, Industrial and Commercial Bank and Agricultural Bank - might be better placed to ride out the problem versus smaller banks.

"Within the banking sector, if you get exposed to it, then the bigger banks are the ones that will at least have the liquidity buffer," said Wellian Wiranto, investment strategist at Barclays Wealth and Investment Management.

"They are the ones which are better capitalised as well, so there is a certain degree of protection there."

Temasek benefited from exposure to defensive stocks such as Singapore Telecommunications Ltd, its biggest holding which offset the impact from underperforming Chinese banks.

The review will likely show that Temasek's portfolio rose by at least 8.6 percent to a record S$215 billion in the year to March 2013, said CIMB's Seng Wun.

Temasek could also provide details on why the state investor sees more value in investing in the developed world despite the stuttering European economies and slowing U.S. economy.

A couple walks along the rough surf during sunset at Oahu's North Shore, December 26, 2013. REUTERS/Kevin Lamarque

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