China's Banking Sector Looks Better with New Corporate Bankruptcy Law

Excerpt from our One Page Annotated Wall Street Journal Summary (receive it by email every morning by signing up here):

HEARD IN ASIA: China's New Bankruptcy Law May Give Lift to Bank Stocks

• Summary: China now has its first formal corporate-bankruptcy process after the Enterprise Bankruptcy Law was enacted last week following twelve long years of deliberation. China's creditor banks stand to benefit most, however, given already high valuations, new buying induced by the bankruptcy law is unlikely but is at least seen as supporting current valuations. Three of China's five largest banks trade publicly with valuations ranging from 16 to 21 times expected earnings, compared to Hong-Kong listed banks averaging 15x and U.S. banks at 12x. The current delinquent loan recovery rate in China is 20% of face value with Moody's estimating that figure to be near 30% for the most recently issued loans and expecting it to approach to the global average of 70% via the newly enacted bankruptcy law.
• Comment on related stocks/ETFs: The three largest publicly traded Chinese banks (Bank of China, China Construction Bank, and Bank of Communications) are not listed in the U.S. However, one way of getting exposure to these banks is with the iShares FTSE/Xinhua China 25 Index (FXI), of which at least 15% of assets (as of the end of July per Morningstar.com) are the three banks. Another way is with the Jardine Fleming China Region fund (JFC) which has the three banks at about 5% of assets. Foreign banks with the largest presences in China that could benefit from the newly enacted bankruptcy law include: Bank of America (BAC), Citigroup (C), HSBC (HBC). The Bank of East Asia (BKEAY), is also an interesting play on Chinese lending. There is ongoing concern about some draft rules for foreign banks operating in China seeking to enter the lending business in the local yuan currency.

Comments

[Dan Harris:]

I do see the new bankruptcy laws (when they come into force in June, 2007) greatly helping the creditor banks, but I still do not see China's bank collection rates hitting those of the rest of the world, at least not in the short term. Collecting on judgments is still too difficult for that to be the case yet.

chinalawblog.com

2006 Sep 06 12:14 AM