It's Official! Sell-Off in Chinese Banks "Irrational"

In the first half of 2008, the shares in Chinese banks have fallen 43% in Shanghai, and 13% in HK wiping out US#300 billion of market value. However, JP Morgan belivese that the current sell-off in the Chinese banks is irrational due to misplaced fears over margins, bad debts, etc. according to a recent report.

If you will recall, I have been saying just that for a number of months. Now it's official. At current levels, they are a BUY and HOLD for medium to long term and a trading opportunity for the short term.

I particularly like the Chinese banks without foreign shareholders. Those with foreign partners are overvalued vis-a-vis their peers because of the "halo" effect. However, the foreign partners do not have control (either from management or operationally) and can only provide "technical" assistance for new products. The thinking is that with foreign partners on board, the banks are unlikely to make bad loans. Well, the HSBC subsidiary in the US made big bad decisions on sub prime too. When banks made bad decisions it doesn't matter who is on board. Without a steady partner, the Chinese banks can "cherry pick" and choose the "best of breed" partner for each new product.

Actually, Chinese companies are a screaming BUY. The current pessimistic view is a result of "transference" i.e. anaylsts are projecting the current problems in the western economies to China. Too often I hear the argument that "If the US economy is down, how can the Chinese economy which depends on exports to the US remain bouyant?" Well we need to look at the portion of US exports to GDP and compare that to internal consumption which is growing soo rapidly that the Chinese government has to hold it down. In the US, the government is worrying about recession. In other words, internal consumption will make up for short fall in the US market. Also, exports to Europe and the rest of Asia are up.

At the end of the day, the best way to participate in a growing economy is through ownership of bank shares. You don't have to pick individual sectors.