The first-ever depreciation of Agricultural Bank of China (ABC) stock led declines in China banking shares, pulling down the Shanghai Composite Index to its lowest weekly point since July.

The bank, having raised US$22.1 billion in the world's largest initial public offering (IPO) in the A-share market, declined 2.2 percent to 2.62 yuan at the 11:30 AM trading break last Thursday, the first time the bank shares dropped below their IPO price of 2.68 yuan on July 15. It fell a further 1.1 percent to 2.60 yuan last Friday, hitting the lowest since it began trading on the Shanghai exchange.

One of the main reasons for the decline was a rumor that the banking regulator may boost big banks' capital adequacy ratios to as high as 15 percent by 2012, which raised investors' concerns about the bank's asset quality and loan growth, said Gui Haoming, the chief analyst of Shanghai-based Shenyin & Wanguo Securities.

However, China Banking Regulatory Commission (CBRC), the country's central banking regulator, said later that there would be no new rules to impose tighter capital requirements on the nation's banks. The lowest required capital adequacy ratio for small- to medium-sized banks is 10 percent, while the ratio for big banks is 11.5 percent, according to the CBRC.

Dropping below the IPO price indicated the return to a reasonable price level for ABC shares, according to Fu Lichun, chief analyst of the banking industry at Chongqing-based Southwest Securities Company.

"After removing the greenshoe options that have stabilized the share price of Agricultural Bank of China for one month since its debut, the market is playing a more important role in determining the share value," said Xie Peijie, an analyst from Central China Securities Holdings Co Ltd.

Over the next few months, the China Securities Regulatory Commission will conduct an investigation into alleged insider trading by securities companies. The commission has conducted 19 insider dealing investigations, just over half during the last two months. The increasingly strict rules relating to trading will make China's stock market more efficient, said Mao Bihua, deputy director of the inspection department of the commission.

Given the expectation that the People's Bank of China may raise interest rates after the consumer price index hit 3.5 percent in August, the highest in the last 22 months, investors may remain pessimistic regarding China's stock market in the near future, said Gui.

The Shanghai Composite Index declined 2.4 percent last week to 2598.69 at the close on Friday, the most in more than two months, on concern that regulators will raise borrowing costs. China's stock prices may continue to fluctuate in the coming months, former Morgan Stanley economist Andy Xie said.

Nevertheless, the gloomy outlook for ABC stock may discourage investors only in the short term, and there is limited room for the share price to drop further, said Gui.

(China Daily September 20, 2010)