On January 8, the China Banking Regulatory Commission (CBRC) gathered senior officials from major commercial banks, emphasizing that in time of uncertainty, banks should alert the Commission of risk matters and evaluation in a timely fashion.

Since the last day of 2008, major foreign investors - namely foreign banking institutions - had off-loaded some 11 billion shares from the Hong Kong listed arms of several Chinese banks, which they had acquired through tedious negotiations when the latter first listed.

Fleeing from Chinese Banks
On December 31, 2008, a day after the expiry of the lock-up period - which prevented sale of Chinese companies' stakes by foreign owners - for Bank of China (BOC) shares, Switzerland's UBS sold its 1.3% stake in BOC, setting the first domino in motion.

A week later on January 7, Bank of America (BOA) sold 5.6 billion of its shares in the Construction Bank of China (CBC), thereby reducing its stake in the bank from 19.13% to 16.6%. Part of BOA stakes in CBC were freed from the lock-up period since Oct 27, 2008.

The next day, Li Ka Shing Foundation (LKSF), BOC's biggest foreign shareholder, sold two billion shares, about 40% of the stakes it held in BOC, and thus raising a total of 524 million US dollars.

Later, news also emerged that the Royal Bank of Scotland was also mulling to over unloading its stakes in BOC.

The series of divestments led to slumps in the Hong Kong market. On January 7 and 8, share prices in the financial sector dropped by 5.32% and 5.64% respectively.

Industry players believed the divestments were fundraising efforts aimed at overcoming cash flow shortages. A Chinese banker also stated that the pesimistic outlook of the Chinese economy could also be another reason.

However, a source close to UBS denied the move had anything to do with the bank's financial status, adding it was reducing liabilities as most banks were doing during the current gloomy economic outlook.

Guo Tianyong, director of the China Banking Institute under the Central University of Finance and Economics, attended the special meeting called by the CBRC on Jan 8.

Guo said during a time of difficulties and uncertainties, the government could consider extraordinary measures to maintain market stability and confidence.

He said for instance, pooling resources from state-owned funds – such as the sovereign wealth fund of China Investment Corporation (CIC), the state investment arm of Central Huijin Investment Corporation (Huijin), and the National Social Security Fund (NSSF)– to takeover the shares divested by foreign investors.

Samuel Chen, banking sector analyst from JPMorgan Chase & Co, held that the legal framework and market sentiment were favorable of Hujin buying shares of BOC.

However, for Huijin to acquire shares of CBC might draw some criticism, Chen added.

The reason being Huijin was the one which sold its stakes in CBC to the Bank of America (BOA) last year, at a lower price than the market value through an option offer.

If Huijin were to buy the shares dumped by BOA now at a higher price than before, the move would seem foolish.

There would be a higher likelihood for Huijin to increase stakes in BOC to boost market confidence and future gains, industry sources told the EO.

Huijin was already the majority shareholder of BOC, owning over 67% of the bank's shares.

Current and Future Impact
"The market was filled with panic and uncertainty, fearing that more divestments will follow.

"The lock-up period for Industrial and Commercial Bank of China (ICBC) shares will expire in April, and all eyes are watching to see if Goldman Sachs dumps its shares," said a source close to the CBRC.

By April 28, some 12.1 billion shares in the Hong Kong listed arm of ICBC would be freed from the lock-up period. Of these shares, Goldman Sachs owned 8.2 billion units, Allianz Group held 3.2 billion, and American Express kept 600 million shares.

The pressure of having its shares off-loaded in bulk would soon land on ICBC too, some market observers believed. They also expected Chinese banks in general would see their gains contracted this year.

The situation was not at all dire either.

One financial analyst said even if bad debt climbed in Chinese banks due to a volatile economic environment, it would take a quadrupling of bad assets to halt profit growth at 0%, a scenario he believed to be unlikely.

Yet at a recent CBRC meeting, some expressed concern that foreign divestment of Chinese banks in the Hong Kong Stock Exchange would eventually affect the banks' valuation in the mainland A-share market stock market.

Market analyst Zhang Jixiu of Bohai Securities believed the A-share market would be under pressure in the short run. But from a long-term perspective, the divestment made by foreign investors at this point would have been a loss.

"In a few years, they would realize they have off loaded the shares at their bottom price," Zhang added.