SHANGHAI - Banking shares edged higher in Shanghai on Friday after reports showed that the State-owned Central Huijin Investment Ltd increased its holdings in Industrial & Commercial Bank of China Ltd (ICBC) and Bank of China Ltd (BOC).

ICBC gained 0.71 percent to 4.28 yuan (67 US cents) amid a 0.7 percent gain for the major Shanghai Composite Index to 2163.39 points.

Trading in BOC shares was suspended in Shanghai on Friday as the lender held a shareholder meeting.

Shenyin & Wanguo Securities Co Ltd's banking industry index rose 0.65 percent, or 13.18 points, to 2054.25 points.

Central Huijin, which was created to hold shares in China's State-owned banks, bought 38.5 million ICBC shares, valued at 164.78 million yuan, based on ICBC's closing price in Shanghai on Friday. It also increased its holding in BOC by 144.6 million shares, totaling 428.02 million yuan, based on BOC's 2.96-yuan closing price on Thursday.

The share purchases are consistent with an October statement from Central Huijin that it will "continuously" buy shares of China's "Big Four" banks, including Agricultural Bank of China Ltd and China Construction Bank Corp, in the secondary markets.

The latest purchases come after Central Huijin bought 14.6 million shares in ICBC and 3.51 million shares in BOC on Oct 10.

As of Dec 31, Central Huijin's holding in ICBC was 35.43 percent, while its stake in BOC was 67.6 percent, according to statements from the two lenders on Thursday.

"The purchases are relatively small in amount. It's a symbolic move showing that Central Huijin thinks shares in the banks are undervalued," said Jin Lin, a banking industry analyst with Shanghai-based Orient Securities Co Ltd.

He added that Central Huijin's share purchases are likely to continue this year and said that he is bullish on the banking sector over the longer term.

Chinese banking shares are undervalued in terms of their price-to-book (P/B) ratio.

A P/B ratio is used to make a comparison between the book value of a company and its current market price. It is commonly used to compare banks because most of their assets and liabilities are constantly valued through market prices.

China's 16 listed lenders had an average P/B ratio of around 1.31 on Dec 31, while the ratio for the entire A-share market was around 1.9 on the same day.

"The low P/B ratio means Central Huijin is actually buying shares at book value. That is a very good deal," said Jin.

He said the P/B ratio will need to rise to around 1.5 for the banking sector to be viewed as "fairly valued".

The low P/B ratio comes as lenders continue to report strong results. The 16 listed Chinese banks reported an average increase in profit of 30 percent in the third quarter of 2011.