Hong Kong, China shares fall; smaller Chinese lenders underperfom "Big Four"

Mon Jul 22, 2013 12:51am EDT

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* HSI -0.2 pct, H-shares -0.9 pct, CSI300 -0.6 pct

* Losses in weak vol, latest rate reform move not seen major

* Minsheng tops losses for smaller Chinese lenders

* CR Power jumps; minority shareholders reject CR Power merger

By Clement Tan

July 22 (Reuters) - Hong Kong and China shares fell on Monday, as mid-sized Chinese banks underperformed after Beijing scrapped the floor on lending rates as investors bet on the ability of their "Big Four" rivals to better withstand rate reforms in the short term.

But losses came in weak volumes in both markets, suggesting the move was not seen as a major game-changer since the People's Bank of China left the key deposit rate ceiling unchanged.

By midday, the Hang Seng Index was down 0.2 percent, while the China Enterprises Index of the top Chinese listings in Hong Kong slid 0.9 percent. Midday Hong Kong turnover neared lows of the past month, with short selling accounting for 9.9 percent of total turnover, versus an 8 percent average.

The CSI300 of the leading Shanghai and Shenzhen A-share listings fell 0.6 percent, while the Shanghai Composite Index slipped 0.5 percent. Midday Shanghai volume was the weakest in nearly two weeks.

"The assumption in the short term is that the bigger banks can at least make up for the hit on their net interest margins from this move with greater loan demand as a result of lower lending rates," said Jackson Wong, Tanrich Securities' vice-president for equity sales.

China Minsheng Bank led losses in the Chinese banking sector in Hong Kong, sinking 2.9 percent. Its mid-sized rival Citic Bank slid 2.8 percent, while China Merchants Bank shed 1.7 percent.

Industrial and Commercial Bank of China, China Construction Bank (CCB), Bank of China and Agricultural Bank of China (AgBank) pared early gains to creep down by as much as 1.2 percent.

Short interests accounted for 35 percent of CCB's turnover, while the percentage stood at 28 percent for Minsheng.

In the mainland, Merchants Bank slid 2.3 percent, Minsheng Bank fell 1.6 percent, while Industrial Bank lost 1.9 percent.

"These smaller banks face higher short-term funding costs than the big state-owned lenders, so their ability to lend may be limited even if they want to," Wong added.

The official Shanghai Securities News cited an adviser to the Chinese central bank as saying on Monday that Chinese deposit rates are not likely to be changed in the near term, suggesting a deposit insurance scheme needs to be instituted before that move becomes viable.

Until then, investors will unlikely be persuaded by the historic low valuations for the Chinese banking sector, with nearly all major names trading at price-to-book values of about a 50 percent discount to their historical medians.

ICBC, the sector's leading player, is now down almost 12 percent and trading at a price-to-book value of 1.0 in Hong Kong, while Minsheng Bank has dived 15 percent and is trading at 0.8 times price-to-book, according to Thomson Reuters StarMine.

Friday's announcement left intact Beijing's differentiated lending policies for the housing market, hurting the shares of Chinese property developers. Poly Real Estate declined 2.7 percent in Shanghai, while China Overseas Land lost 1.7 percent in Hong Kong.

But China Resources Power jumped 4.2 percent in Hong Kong. At the midday break, the company said its minority shareholders rejected a plan to merge with China Resources Gas .

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