Run before others

Temasek: Temasek has shown shrewd timing. The Singapore state fund’s $3.6 billion sale of Chinese bank shares could be seen as a big thumb-down for the country’s lenders. After all, Temasek is one of their earliest and biggest foreign investors. But, the muted market reaction suggests Temasek took advantage of a surge in short-sellers who needed to cover their bets. Its surprise move looks more like an opportunistic attempt to run ahead of other potential sellers.

Foreign strategic investors in Chinese banks are probably all looking at paring their holdings. Asset quality is the biggest worry. Moody’s recently warned that a jump in local government loan defaults could push the ratio of non-performing loans for Chinese banks as high as 12 per cent of total loans, well above the rating agency’s base case scenario of five per cent to eight per cent.

Temasek’s move looks like an attempt to lock in a profit before other big sellers further depress share prices. Bank of America, which is trying to meet more stringent capital requirements, is likely to sell a majority of its $20-billion stake in China Construction Bank when its lock-up period expires at the end of August. Investors holding about $6 billion worth of shares in Agricultural Bank of China will be free to sell from July 15, potentially creating further supply.

Some hedge funds appear to have been anticipating the sales by selling Chinese bank shares short. In early July, short sellers held the equivalent of 15 per cent of the daily turnover in China Construction Bank shares, versus about five per cent a month earlier, according to Thomson Reuters data. But a broad market rebound may have left some short-sellers rushing to cover their bets.

This dynamic enabled Morgan Stanley, Temasek’s bank, to fill its order books in less than three hours, according to a person familiar with the situation. What’s more, the CCB shares were sold at a tight 3.4 per cent discount to the closing price.

Temasek is hardly selling out entirely. It remains a significant shareholder in Chinese banks, with six per cent of the Hong Kong-listed shares of both CCB and BOC. Even if it wants to sell, it has committed not to sell any more CCB and BOC shares for three months. Next time, Temasek will have to wait in line.