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China’s Strong PMI Data Has a Dark Side for State-Owned Banks

The State Council, China's cabinet, recently told state banks to give more loan support to the agriculture sector and small- to mid-sized companies. The government's policy banks and smaller, commercial banks are expected to follow suit soon, Merrill Lynch said. Meanwhile, the government's central bank and banking regulators have adjusted rules to promote business and mortgage lending.

The state-owned brokerage BOC International warned Thursday of falling valuations for most China's banks, but recommended stock in China Merchants and Agricultural Bank of China (ACGBY). Haitong Securities is also recommending China Merchants.

Thanks to "the government's intention to maintain economic growth and a loose liquidity environment," China's financial system "has not seen the major crisis that the market expected over the past three years," BOC said. "However, the valuation of China's banking sector has continued to decline."

Loose liquidity is expected to continue through the second half of the year, BOC said, so barring a major property market crash "the downside risks of the banks' valuations should be limited."

Read More: The Story Behind Sarepta's Firing of its Top Scientist

"However, if property prices and sales volume fall sharply, the banks' share prices may drop significantly," the report said.

At the time of publication, the author held no positions in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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