Too State-Owned To Fail

The giant Agricultural Bank of China has landed its monster official public offering. Investors have made an expression of confidence probably more in China than in the bank itself. Given that we don’t know what lays down the road in terms of bad loans on the books, or of the growth prospects of a bank that has more customers than the U.S. has people (though its loan book is heavily corporate, despite the bank’s name), investors may have convinced themselves that they have the double insurance that Agriculture Bank is both too big to fail and still too state-owned to fail.

Shoring Up Chinese Banks’ Balance Sheets

The great shoring up of China’s state-run banks continues with Bank of China’s announcement that it is seeking to raise 60 billion yuan ($8.9 billion) of new capital through a shares issue in Shanghai and Hong Kong. This follows the $5.9 billion that the bank, the country’s fourth largest lender, raised via convertible bonds last month. Bank of China was one of two of the four big state-run banks (China Construction Bank was the other) that fell below the regulators required capital adequacy ratio in March,

Agricultural Bank of China, the no 3 lender, is looking to raise $23 billion through what would be the world’s largest initial public offering (final pricing due on Tuesday). ICBC and China Construction Bank, the two biggest lenders, have also said they plan to raise new capital.

We hear that institutional investors have modestly oversubscribed their part of the Agricultural Bank’s issue, unlike the manic demand that surrounded the last round of Chinese state-bank capital raising in 2006. They are not alone in their nervousness. In May the state council reduced its targets for the big four’s capital raising to a total of 287 billion yuan, down from the original 331 billion yuan seen a necessary to boost the banks’ balance sheets following the record lending undertaken over the past couple of years as part of the government’s stimulus program.

Quite how many bad loans will turn out to be sitting in those swollen loan books is the million dollar question. With as much as 20% of the loan assets of China’s banks now sitting in the unregulated underground banking system that operates at the county and city level, often hand in glove with local officials, we may not know until it is too late.

China’s Agricultural Bank To Raise $30B Through IPO

This may not seem an ideal time for a bank to be raising capital: the government is reining in bank lending as part of its crackdown on real estate speculation; investors worldwide are spooked by the Eurozone debt crisis; bank valuations are at lows; and many banks are seeking to raise capital to bolster inadequate balance sheets. Yet Agricultural Bank of China is going to market in Shanghai and Hong Kong with an initial public offering of 15% of its equity said to raise up to $30 billion. That would make it the world’s largest IPO, topping the $22 billion Industrial & Commercial Bank of China (ICBC) raised in 2006. The securities regulator is due to review the offer plan on June 9, with mid-July said to be the target date for the IPO itself.

Four other big state-owned banks, ICBC, China Construction Bank, Bank of China and Bank of Communications have announced plans to raise $27 billion of new capital by selling shares and bonds this year, now regulators have raised the mandatory minimum capital adequacy ratio to 11.5%. Agricultural Bank, the country’s fourth-largest by assets, is the least profitable of the four biggest banks to go through the state-led restructuring of a couple of years back. It got a 130 billion yuan government cash injection and scratched 816 billion yuan of non-performing loans from its balance sheet in 2008.

The bank says it had a capital adequacy ratio of 10.07% at the end of 2009 and its non-performing loan ratio stood at 2.91%. It also says it increased its profit by 26% to 65 billion yuan last year, and forecasts net income will rise to at least 82.9 billion yuan in 2010. But to raise the sort of sum it is looking for in the current climate, its underwriters are going to have to have some big Chinese institutional investors lined up.

China CNR Gets IPO Clearance

Securities regulators have given China CNR the go-ahead for its proposed 6.5 billion yuan ($1 billion) initial public offering for up to 34% of its equity. The company, which along with China South Locomotive & Rolling Stock (CSR), is one of the two leading railway engineering groups, plans to use the money to upgrade its production and technology capabilities to compete in the world’s fastest growing large railway market and in which the government is spending big to expand the high-speed inter-city network.

Regulators have been concerned that the recent wave of IPOs and proposed IPOs risked flooding a stock market that was showing signs of correcting after having risen 90% since the start of the year. China International Capital Corp (CICC), Huatai Securities and Huarong Securities will be the joint lead underwriters of the China CNR offering. China CNR’s shares will be listed on the Shanghai-A market. CSR is already listed in Shanghai and Hong Kong.

CSCEC Gets It IPO Away With Ease

China State Construction Engineering Corp. (CSCEC) got its IPO out at 4.18 yuan a share, top of the indicated range, and raising 50 billion yuan ($7.3 billion) for 40% of the A-shares. That values  the company at 125 billion yuan, or 51.3 times earnings on a fully diluted basis. With the offering oversubscribed 35 times, this Bystander still thinks this a rich price with bubbly undertones.

China Zhongwang Prices $1 Billion-Plus IPO

Word is that China Zhongwang got $1.3 billion from its initial public offering in Hong Kong. That was less than the $1.6 billion it was looking for, but would still make it the first billion dollar IPO since China South Locomotive & Rolling Stock raised $1.6 billion last August.

The IPO market worldwide has been pretty moribund for all the obvious reasons. China Zhongwang is Asia’s largest maker of extruded aluminum products, which investors see as benefiting from Beijing’s stimulus spending, particularly on new rail lines. Transport-related aluminum products typically have fatter margins than those used in construction. Last year China consumed 39% of the world’s output of extruded aluminum.

The IPO price values the company at just shy of $5 billion, 10 times 2009’s estimated earnings. Trading in the stock is due to start May 8.

China Railway Construction IPO Is Lackluster

As in Shanghai, so in Hong Kong. The initial public offering of shares in China Railway Construction Corp. in Hong Kong saw only a modest 12% pop during the first day of trading, the smallest gain in a Hong Kong trading debut since November. The Shanghai IPO earlier in the week was the worst first-day gain there since 2006.

China Railway Construction, which shares a duopoly with China Railway Group over railway construction in China, raised a combined $5.4 billion in the two offerings. The lackluster IPO makes one wonder how robust China’s stock market boom remains, and suggests that other new share offerings might struggle to find buyers for as long as world market conditions remain so uncertain.

The Trillion Dollar Company

PetroChina is the first firm to be worth $1 trillion.

Shares in the publicly quoted arm of China National Petroleum Corp. nearly tripled on their first day of trading in Shanghai. They already traded on the Hong Kong and New York exchanges. PetroChina’s initial public offering in Shanghai raised $8.9 billion dollars — a record for a Chinese domestic float, and the shares popped from the issue price of 16.70 yuan ($2.24) to 43.96 yuan ($5.90). CNPC holds 85% of the shares, so the pool of tradable shares is relatively small.

American investor Warren Buffett had been an investor in PetroChina but sold off his 2.3 billion share stake at a profit of $3.5 billion.

The Shanghai market is so frothy and the dollar so weak that the $1 trillion figure is a bit of an artifact, but it makes PetroChina twice the size of Exxon Mobil in terms of market cap, and bigger than the entire Russian stock market.