SHANGHAI (Reuters) - Investors in Chinese bank stocks reacted cautiously on Monday to draft rules for the country’s first deposit insurance scheme, with a rally in mainland-listed shares of the “big five” lenders petering out while their Hong Kong traded shares fell.
The scheme, announced on Sunday, is the latest in a series of steps to fully liberalize interest rates and allow banks to compete on a wholly commercial basis.
Legal protection for deposits could entice more savers to park their money in banks, but also threatens to erode profit margins as competition between lenders heats up.
The scheme may come into play in the second-quarter of next year, according to Economic Information, a publication affiliated to the official Xinhua news agency, although the State Council gave no indication of a launch date.
Shares in Industrial and Commercial Bank of China Ltd (601398.SS) (1398.HK), the country’s largest lender, and Agricultural Bank of China Ltd (601288.SS) (1288.HK) both rose more than 2 percent in early trading in Shanghai on Monday, before reversing course to finish lower on the day.
Shanghai shares of China Construction Bank Corp (601939.SS) (0939.HK), Bank of Communications Co Ltd (601328.SS) (3328.HK) and Bank of China Ltd (601988.SS) (3988.HK) all gave up some early gains but closed up more than 1 percent.
China banking shares had enjoyed a strong rally in the run-up to the announcement of the deposit scheme, with an index of major Chinese banks CSI300.BI gaining more than 8 percent on Friday alone.
“The announcement of deposit insurance system has some positive impacts on the bank shares today,” said Zhang Yanbing, analyst at Zheshang Securities in Shanghai.
“However, the main reason behind the massive rises of bank stocks since last Friday is that investors boldly expect further monetary policy easing to come in the near-term, causing them to confidently price in the market to sustain the current rally.”
But while China-based investors continue to push money into banking shares, Hong Kong traders are wary that the mainland rally is getting overbought.
Hong Kong listed stocks of the big five Chinese lenders all fell 2-3 percent.
Underlining the divergence in valuations between China’s onshore and offshore markets, an index measuring price differences between dual listed shares in Hong Kong and Shanghai .HSCAHPI hit its highest level since July 2013.
The deposit insurance scheme undermines the belief that China will always bail out its banks, as insuring savings implies that borrowers will be saved even as lenders fail, said analysts.
That could mean depositors with savings in small banks of above the insured amount will move their money to larger lenders, in the belief they are less likely to fall.
“Some people will fly away from small institutions,” said Jiahe Chen, chief strategist at Cinda Securities, although he added that the impact would be small.
The insurance premium will be different for each bank and will depend in part on how the institution’s risk is assessed.
This means small rural outfits, such as Chongqing Rural Commercial Bank Co Ltd (3618.HK), will be most affected “due to its higher proportion of retail deposits and potentially higher premium rate”, according to a research note by Barclays Research.
Also, smaller banks will find it tough to lure deposits as China’s economy slows, as under current rules banks are limited by a 3.3 percent cap on deposits, making it difficult for them to compete on price.
Additional reporting by Shanghai Newsroom and Jake Spring in Beijing; Editing by Alex Richardson