Tuesday, October 18, 2005

Apparently, Huijin Company, the government investment vehicle that now runs half the financial sector in China, offered to buy put contracts issued by Bank of America and Tamesek of Singapore. Basically, Huijin will buy back CCB and BOC shares if the two banks fail to go IPO in three years or if the share prices of the two banks fall below IPO prices in three years.

While I find the first kind of put contract reasonable, since exogenous shocks have delayed IPOs before, I think the 3-year buy-back agreement will create even more distortion. As major foreign investors are supposed to inject human capital to improve the performance of the banks, they should bear some responsibility for the performance of the banks. This Huijin buy-back offer would just encourage foreign investors to be lazy and to wait for a Huijin buyback. Moreover, Huijin now has the incentive to bailout the two banks with its own resources or to lobby the State Council for more resources for bailouts because it wants to avoid the embarrassing prospect of having to buy-back shares. Knowing that, both the domestic and foreign managers in the banks would have extra incentives to blackmail Huijin with reckless lending. Basically saying, “if you don’t bail us out, you will have to buy back shares from foreign investors, which is both costly and embarrassing.” Also, what about the hundreds of thousands of small Hong Kong investors who bought shares? Will they get compensated if the share prices of these banks plummet?

China to buy back foreign investors' CCB, BoC stakes if IPOs fail - report

09.20.2005, 12:23 AM

SHANGHAI (AFX) - China Huijin Investment will buy back foreign shareholdings in Bank of China and China Construction Bank if these two major state banks do not go public successfully three years after the foreign buy-ins, the Takungpao reported, citing Xie Ping, Huijin's general manager.

Takungpao, a Beijing-backed newspaper based in Hong Kong, said Huijin will also compensate foreign investors if the share price after three years is lower than the price they paid to buy in.

'For example, the entry price of foreign investors is based on the bank's equity per share on Dec 31 last year, and if share price after three years is lower than that, Huijin will pay for their losses, ' Xie said.

'Of course, the possibility this kind of situation will happen is tiny, and will only occur when there are huge amounts of non-performing assets,' he added.

Xie told the newspaper that foreign institutions sought preconditions to their investments, including appointments as the major underwriters for the banks' IPO, although such demands cannot always be met.

Meanwhile, Huijin said it cannot undertake to keep the bank's non-performing ratios below a certain level in the next several years.

Bank of China has tied up with a group led by Royal Bank of Scotland and Singapore's state investment arm Temasek Holdings.

Bank of America Corp has completed the acquisition of a nine pct stake in state-owned China Construction Bank for 2.5 bln usd.

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