Elite Chinese Politics and Political Economy

Wow, the listing of the Industrial and Commercial Bank of China will create the largest IPO in the world up to this point at 19 billion dollars. Can you imagine if China was to then sell off most of the shares of ICBC or another one of the Big Four banks? Given the huge amount of interest in the listing (I think the figure is by now up to 420 billion USD in orders), I dare say they can easily raise well over 100 billion dollars, or nearly 1 trillion RMB. Can you imagine how many school kids can then go to school?

Unlike interest in companies like Google, however, the high demand for ICBC probably stems more out of a mix of the global saving glut (I am increasingly convinced of this theory put forth by Chairman Bernanke), and short-term expectation of decent profit than genuine confidence in the management. Having done extensive interviews with ICBC officials in 2000-2001, I still find it hard that the bank has really made such a great transition in the space of five years. While I think BOC has really cleaned house and restructured internal management, my impression is that ICBC has not done so to the same extent.

Well, what can one say in the midst of this euphoria. I leave you with what ICBC vice-President Wang Lili told senior officials in a speech she delivered at the Central Party School on January 8th, 2002 "Currently, we have inadequate bad debt reserve and can only use profit to writeoff NPLs. Also, the Ministry of Finance says that we can at most use 1% of our asset to write-off NPLs. We have to think of another way--ICBC curently has 250b (RMB) in policy loans and 160b of it is NPLs, so if the state can take it off our hands, our NPL ratio would decrease by 6%. These loans can go to policy banks and be restructured over the long-term......In 1998, MOF recapitalized the Big 4 banks with 270b, which gave them 5% capital adequacy ratio. However, with the rapid rise in deposits, the state will need to recapitalize another 400b in 2003. IPO is not an answer, since the Chinese market is not ready to raise this kind of money.... "

Again, I ask how a bank with so much self doubt just four years ago suddenly becomes the darling of the global financial market.

FB Business, Technology
ICBC share offer raises a record US$19.1b Lender prices stock at top of the range after taking HK$423.7b in retail orders
Tim LeeMaster
597 words
21 October 2006
South China Morning Post
1
English
(c) 2006 South China Morning Post Publishers Limited, Hong Kong. All rights reserved.

Industrial and Commercial Bank of China, the nation's largest bank, raised a record-breaking US$19.1 billion in the first initial public offering by a mainland company sold simultaneously on the Hong Kong and Shanghai exchanges, market sources said.

The bank sold 35.49 billion H shares, or 10.8 per cent of its enlarged share capital, for HK$3.07 each, and 13 billion A shares in Shanghai for 3.12 yuan.

The Hong Kong sale attracted US$350 billion from institutional investors, or more than 50 times the shares available. Retail investors subscribed for 78 times more shares than were on offer, placing orders worth HK$423.7 billion.

The retail demand triggered an automatic increase in the size of the retail tranche to 10 per cent of the offering from the original 5 per cent.

It also unseated Bank of China, which attracted HK$286 billion in retail orders, from the No1 spot for most-popular IPO in Hong Kong.

"You might say ICBC is the deal of the century because six months ago there were doubts the market could absorb US$20 billion of a bank without a balance sheet to speak of," said a fund manager who asked not to be identified. "It may be a better indicator of the massive liquidity, and not just mainland liquidity, and that we remain in some kind of bull market."

The pricing values the bank at 2.23 times this year's book value and two times next year's book. That is 15 per cent cheaper than China Construction Bank, which raised US$9 billion in an IPO last year, and 4 per cent cheaper than BOC, which sold shares in June.

ICBC is likely to sell an additional 5.31 billion H shares and another 1.95 billion A shares, taking the total to US$21.9 billion.

The world's largest IPO had been the US$18.3 billion share sale in 1998 by Japanese mobile phone operator NTT DoCoMo.

ICBC shares will begin trading Friday.

The lender will pay out 45 to 60 per cent of its earnings in dividends next year and in 2008. "That's almost double the competition and something we haven't seen from mainland banks," the fund manager said. "One of the hallmarks of good corporate governance is to return cash they aren't using."

China Construction Bank plans to pay out 35 per cent of its net profit in dividends while BOC proposes to pay 45 per cent over the same period.

ICBC expects its net profit to increase 26 per cent to 47 billion yuan this year and forecasts annual earnings growth of 20 per cent to 30 per cent.

Merrill Lynch, Deutsche Bank, Credit Suisse, ICEA and CICC are arranging the Hong Kong IPO.

China International Capital Corp, Citic Securities, Guotai Junan Securities and Shenyin Wanguo Securities are handling the mainland sale.

The deal puts Merrill Lynch top of the investment banking league tables for Asia outside Japan with imputed fees of US$120.9 million earned so far this year from 13 IPOs, according to Thomson Financial data. Credit Suisse will take the No2 position with US$99.4 million from seven sales while Goldman Sachs, which had held the No1 slot before the ICBC sale, will be third with US$99.3 million from 11 deals.


The Buzz
Record China IPO Could Have Been Even Bigger --- ICBC Offering Highlights Global Investors' Appetite; 'The Wall of Liquidity'
By Kate Linebaugh
743 words
21 October 2006
The Wall Street Journal
B3
English
(Copyright (c) 2006, Dow Jones & Company, Inc.)

BEIJING -- The record-breaking initial stock sale of China's biggest bank underscores how eager global investors are to write fat checks to sate the capital needs of China's companies.

The initial public offering of Industrial & Commercial Bank of China Ltd., or ICBC -- the world's biggest IPO, which will start trading Oct. 27 -- attracted $350 billion of demand from global investors, more than any other offering in Hong Kong's history. The domestic portion of the stock sale drew $80 billion. All that for a $21.9 billion deal.

But it isn't just this offering. China Merchants Bank Ltd. had $100 billion of demand for its $2.4 billion deal last month.

"I am staggered by the wall of liquidity that exists in the capital markets right now," says Steven Barg, UBS AG's head of equity capital markets for Asia. "The amount of money that has shown up for this, what it says in my mind is we are still in early days with respect to China."

China's state-owned companies have been regularly tapping international capital markets for the past decade, as Beijing has sought to fortify the balance sheets of the country's biggest companies, to improve corporate governance and transparency, and to give China's industry leaders global recognition. Since the beginning of the decade, Chinese companies have raised more than $100 billion from equity markets, according to Thomson Financial. About half of that has come in the past two years, and largely from the country's biggest banks.

Share sales by Chinese companies are also accounting for a greater share of global-equity sales -- 5.2% last year, by value, compared with 2.8% five years before, according to Thomson. This year, Chinese companies are on track to account for about 10% of the global total, surpassing the amount of equity raised by companies in the world's second-largest economy, Japan. From Chinese supermarket chains to fertilizer producers, companies haven't found any difficulty lately raising cash from international investors who are seeking ways to tap an economy growing faster than 10%.

That was certainly the case for ICBC. From Goldman Sachs Group Inc. to Hong Kong's tycoons to individual, or "retail," investors in Hong Kong and Shanghai, where the bank will list its shares, it seemed everyone wanted to grab a piece of the bank. In Hong Kong, retail investors lined up for a copy of the 671-page offering document, or prospectus.

That is, in part, because shares of its rivals -- Bank of China Ltd. and China Construction Bank Corp. -- have performed well. As the biggest bank, ICBC is likely to be included in regional stock indexes and so is all the more attractive to investors.

And bankers don't foresee a slowdown in Chinese companies coming to market, although not through deals as big as the bank offerings.

"With China's steady economic growth, China's enterprises and consumers need money," says Sherry Liu, China vice chairman of J.P. Morgan Chase & Co.

For investors, the country's banks offer broad exposure to China in a way that most other industries don't. ICBC, for instance, has a nationwide branch network of 18,000, more than any other lender. It claims 2.5 million corporate customers and 150 million personal accounts.

The euphoria helped ICBC price its offering at the high end of an indicative range. It set the share price for the Hong Kong offering at 3.07 Hong Kong dollars, or 39 U.S. cents, the top of a range that started at HK$2.56, according to a person familiar with the deal. The shares traded on the Shanghai market, which are a separate class, were set at 3.11 yuan (39 U.S. cents) apiece, according to a person familiar with the deal.

At that price level, ICBC raised US$19.07 billion in the sale, besting Japan's NTT Mobile Communications Network Inc., whose US$18.4 billion IPO in 1998 had been the biggest. The ICBC deal could still increase by 15% to US$21.9 billion if an overallotment option is exercised. Merrill Lynch & Co., Credit Suisse Group, Deutsche Bank AG, China International Capital Corp. and ICBC's investment-banking unit are managing the global offering.