The global banking strains have spread to China with the country’s government last night surprising with a very public move to buy shares in its four biggest lenders after their shares have fallen 30% in recent months.

The move, released by way of a statement on the official Xinhua newsagency website saw the key arm of the country’s sovereign wealth fund step into the market and buy shares in the quartet of banks. It was the most startling news on a day when at least one more European bank revealed a surprise loss and the need to retain a government capital injection dating to the GFC.

In Beijing, the last time the government revealed such a move in such a public way was in 2008 in the GFC. Last night’s news story on Xhinhua started:

“Central Huijin Investment Ltd, an arm of China’s sovereign wealth fund, bought shares in four major Chinese state-owned banks on the secondary market on Monday,” the company said.

The four banks include the Industrial and Commercial Bank of China (ICBC), Agricultural Bank of China (ABC), Bank of China (BOC) and China Construction Bank (CCB).

The move is aimed at supporting the steady operation and development of major financial institutions and stabilising their stock prices.

It is not clear how many shares Central Huijin bought in the banks.

Central Huijin is the government’s shareholders in these banks. Kerry Stokes Seven Group Holdings is a small shareholder in Agricultural Bank of China, having taken up its stake in last year’s float in Hong Kong.

The shares in the four banks are also listed in Hong Kong and they, along with the shares of some big Chinese resource and industrial companies, have become popular “shorts” for the US and other hedge funds who are convinced the Chinese economy is going to crash (the Australian dollar and shares in BHP Billiton and Rio are also being shorted because of their exposure to the Chinese economy’s current 9% growth rate).

This short has been going on for more than a year (the hedge funds also short the credit default swaps on Chinese debt. Copper is being shorted as well as China is the world’s biggest importer and consumer of the metal).

The shorting of bank stocks and other Chinese shares have driven down by 35% this year the index that tracks these shares in Hong Kong, while Hong Kong’s main Hang Seng market index is off more than 25% so far this year because of local factors, and the negative sentiment about China.

Yesterday’s move by the Chinese government came after trading had finished in Shanghai and that left the market at a 30-month low. That market had opened after China went holiday last week for the National Day celebrations. But trading was still going on in Hong Kong and the announcement saw a surge in the local market, which rebounded from early losses, while the prices of Chinese listed companies, especially the banks, jumped.

Analysts say that rebound will continue today, especially after the big rallies in Europe and the US overnight. It could see several of the hedge funds and other shorts caught if they can’t cover their positions. That is probably what the government is aiming to do with the rare public statement of support for the banks.

The hedge funds have ample reason to short China, if this colourful report, also on Xinhua, is to be believed:

China’s small businesses turned to be the first to ring the alarm as the country is walking a fine line between fighting inflation and maintaining growth.

Some entrepreneurs have disappeared and others have jumped off buildings almost every week since April in Wenzhou City, an entrepreneurial capital in eastern China’s Zhejiang province.

The sudden disappearance of the business owners has revealed a surprisingly gloomy picture for the small- and medium-sized enterprises (SMEs) in China.

Later in the day in Europe, details of the bailout of French-Belgium bank Dexia were revealed, at a cost that could reach €90 billion in guarantees and a major Austrian bank with significant lending to Hungary and other parts of eastern Europe, has revealed losses and capital injections of close to €1 billion. Erste Group Bank said it would lose up to €800 million this year and not pay a dividend after losing money on foreign currency loans (mostly Swiss francs) in Hungary.

As well, it has written down its remaining eurozone sovereign debt. Erste was supported  in 2008 by the Austrian government, which injected €1.2 billion of non-voting capital repayment of which will be delayed by a year to give the bank time to rebuild its capital base.

Reuters says Erste had been expected to earn a 2011 profit of €967 million, so that has been wiped out and there are in effect another €800 million in losses on top of that. It also reported that another Austrian lender, Raiffeisen Bank International, also plans to inject capital into its Hungarian unit as a result of the controversial law.

The eurozone support and bailout plan can’t come soon enough and will have to be big enough, with 100% political support, for it to convince markets that it will work. Anything short of that and the euro will come under renewed pressures and more banks will crack.

Peter Fray

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