Economic Boost Measures in China

Last week, Chinese authorities implemented a series of fiscal and monetary measures aimed at revitalizing the economy.

Key Monetary Actions

Banks are central to the transmission of monetary policy, with a significant step being the reduction of all existing mortgage rates by October 31. UBS analysts predict an overall 100 basis point cut, partially offset by an anticipated 20-25 basis point reduction in deposit rates. This follows:

• 20 basis point reduction to the 7-day repo rate
• 20 basis point reductions in the overnight, 7-day, and 1-month standby facility rates, now at:
  • 7-day repo rate: 2.35%
  • Overnight: 2.50%
  • 1-month: 2.85%

Additionally, there will be a 50 basis point cut in the reserve requirement ratio (RRR). Support measures for the property market were also introduced.

Capital Injection Plans

The Minister of National Financial Regulatory Administration announced plans to inject CET 1 capital into six state-owned banks, with Bloomberg reporting the total could reach 1 trillion RMB (approximately $142 billion). This could impact the Bank of Communications Co Ltd (BoCom), in which HSBC Holdings PLC holds a 19% stake.

Impact on HSBC and Standard Chartered

For HSBC, mainland China contributed 11% of the group’s profit before tax in the first half of 2024, with 66% of that stemming from its stake in BoCom. UBS indicated that most of HSBC’s non-BoCom profits in China were derived from Global Banking & Markets, while retail operations faced slight losses.

Similarly, Standard Chartered saw mainland China accounting for 5% of group revenues, profits, and loans. Investor slides from 2023 indicated that:
– 40% of onshore revenues were from retail
– 60% originated from corporate and institutional banking (CIB), with 27% of retail income driven by wealth management.

Market Implications

Analysts from UBS suggest that both HSBC and StanChart are poised to benefit from a stronger domestic Chinese economy and higher equity markets, predominantly affecting their cost of equity (CoE) and offshore-banked Wealth and CIB through Hong Kong.

HSBC acquired its 19% stake in BoCom for $1.75 billion in 2004. As of mid-2024, this stake holds a book value of $22.1 billion and a market value of $11.1 billion, with the estimated Value in Use (VIU) ranging from $14.1 billion to $31.1 billion.

Uncertainties Surrounding Capital Injection

UBS highlights significant uncertainties regarding a potential capital injection into BoCom. The bank’s base case assumes an A-share private placement at book value, which may not involve HSBC, potentially reducing its stake by 10-20% while retaining associate accounting.

Analysts expressed uncertainty about whether a capital injection would prompt a reassessment of book value. If it did occur, and in line with a $3 billion BoCom write-down in 4Q23, expectations are that such a charge would remain capital neutral.