HONG KONG: China’s big state-banks are a mess, but that is unlikely to deter China-hungry investors.
China Construction Bank, the healthiest of the Big Four group, is expected to seek a Hong Kong listing worth roughly US$5bil later this year, with Bank of China set to follow in 2005 after the two giants recently split a US$45bil funding injection from Beijing to ease their bad loan burdens.
“If the valuation is attractive, we are quite interested in investing in them,” said Preston Ko, fund manager at BCOM Finance here, which oversees about US$150mil.
China IPOs are red-hot and investors are loathe to miss out.
Last month, China Life Insurance Co Ltd completed the world’s biggest initial public offering (IPO) of 2003 when it raised US$3.46bil in a sale that was massively oversubscribed. This month, small farming firm China Green (Holdings) Ltd set a Hong Kong record when the retail portion of its IPO was 1,604 times subscribed.
“The China Life IPO showed you that people are so in love with the possibility of China that they’re willing to buy a pig in a poke,” said Paul Sheehan, analyst at ING Financial.
Chinese IPO mania is fuelled by eight-plus per cent economic growth. The index of Hong Kong–listed Chinese firms, known as H-shares, has more than doubled over the past year.
After decades of lending to unprofitable state companies at government behest, China’s big banks are saddled with bad debts and riddled with inefficiencies and abuses.
Still, for all their woes, those banks are seen by the market as proxies for the country’s furious economic growth.
“You don’t buy for dividends, that’s for sure,” said BOCI analyst Anthony Lok.
Investors, meanwhile, are in a credulous mood and willing to take at face value Beijing’s vows to reform the way its banks do business before the sector is exposed to foreign competition in late 2006 under World Trade Organisation commitments.
“From foreign investors’ point of view, the most important thing is the trend – if there’s a perception that there’s a reformist trend,” said Geoffrey Barker, head of research and chief Asia-Pacific economist for HSBC here.
And China’s banking sector is underdeveloped, especially in retail lending, implying plenty of room for upside.
Traditionally, the Big Four banks have taken deposits and lent money to prop up state enterprises. But as China’s middle class mushrooms, vast opportunities are seen in consumer businesses such as mortgages, credit cards and car loans.
With bad loan ratios that officially stand at 16.86% – private forecasts put the figure closer to 40% – China’s big state-banks are the weak link in its economy.
More funding injections from Beijing are expected to help address the bad loan issue. But industry watchers say a complete transformation in the culture of Chinese banks is needed to make loans based on credit risk and not industrial policy.
Investments from overseas banks might well help. Thus far, foreign giants such as Citigroup and HSBC Holdings have bought into smaller Chinese banks that don’t share the bad debt woes of the Big Four.
“Construction Bank may introduce some strategic partner into the bank, which would be good news because this will help clean up the staff and help update the management systems, credit risk systems...but it takes time for that to change,” said Steven Chan, banking analyst at G.K. Goh here.
Construction Bank trimmed its bad-debt ratio to roughly 11% in 2003. Its profit rose nearly 34% last year to 51.2 billion yuan (US$6.2bil). Industrial and Commercial Bank of China, Bank of China and Agricultural Bank of China complete the Big Four.
“The problem with China is that it’s not a transparent economy...although it is getting better,” said David Chapman, senior portfolio manager at Towry Law, who regards H-shares as overheated at the moment.
“Having said that, the money that the government’s pumping in to deal with the bad debt makes it a little bit better,” he said.
For state-bank IPOs to succeed, markets must remain buoyant.
Beijing learned the hard way in 2002 that “made in China” can’t overcome dire investor sentiment when it was forced to slash its China Telecom Corp IPO by more than half.
Also, if Construction Bank lists this year, it will compete for attention with billions of dollars of expected overseas share sales from Chinese companies such as Ping An Insurance, Semiconductor Manufacturing International Corp, China Netcom, and Air China.
The US$1bil Hong Kong listing expected this year by private Chinese lender Minsheng Banking Corp could serve as a benchmark for valuation and investor interest.
ING’s Sheehan said reform measures thus far were a good start.
“Filling in the hole in a balance sheet is all well and good,” he said. “What you need to do to actually attract investors is you need to show that you’re going to be able to do something with that balance sheet and make some money, as opposed to just not losing money.” – Reuters