I watch this ... have 3+% NAV in this IPO, and nothing to do with patriotism ... it's just about money and returns
economist.com
Bank of China
One country, two banks
Jul 18th 2002 | HONG KONG
From The Economist print edition
For the first time at a big state bank, outside capital is invited—up to a point
Reuters
Where patriots lead, punters follow
AS THE Economist went to press this week, an initial public offering of shares in the Hong Kong subsidiary of the Bank of China, one of the mainland's four state-owned banks, seemed already to be oversubscribed. The first to express interest was Standard Chartered, a British bank with ambitions in mainland China. Then Hong Kong's property tycoons—all unerring friends of Beijing—piled in, led by Li Ka-shing, the city's richest magnate. Thus reassured, students and housewives began queuing at bank branches for application forms. The only investors still sitting on the fence were global fund managers.
The listing prospectus, published on July 15th, is probably the most honest document ever published by a Chinese state bank. “We believe,” it says, “that we are financially independent.” Only believe? The precise degree of independence matters. In Hong Kong, the Bank of China is, after HSBC, the city's second-largest deposit-taker and lender, one of its three issuers of paper currency, and the owner of its most spectacular skyscraper. Among its peer group, on the other hand, it looks decidedly mediocre. Bad loans came to 11% of total loans last year, almost twice the Hong Kong average.
For some investors, such as Standard Chartered, the big difference is that the bank is the only one in Hong Kong that is owned by a mainland parent. As a member of the World Trade Organisation, China has to open its banking system to foreigners. This will benefit those with access to a mainland distribution network.
For most investors, however, the link represents risk. Under any proper accounting, the parent bank would certainly be insolvent—though less emphatically so than the other three big state banks. The international arm needs to protest its independence in order to persuade world investors that foreign money will not be used to engineer a bail-out of its mainland parent.
Even short of that, the affiliation could cause nightmares. One reason why the share offering was delayed, and its New York tranche scrapped entirely, was a series of revelations earlier this year of fraud within the Bank of China. These ranged from nearly $480m of embezzlements at a southern bank branch on the mainland to irregularities by the bank's former chairman, Wang Xuebing, who now faces prosecution in China. The prospectus warns that “other problems associated with past deficiencies may come to light.”
So how independent should investors believe the subsidiary to be? Only a quarter of the bank's equity is for sale in the public offering—for a bit less than $3 billion. That leaves the parent with most of the voting rights and the power to appoint directors. On the other hand, minority investors will have redress in Hong Kong's courts to sue if they feel ripped off, and the four independent directors will keep that in mind. As for the other directors—above all, Liu Mingkang, the bank's chairman both on the mainland and in Hong Kong—the incentives are also reassuring. Any perceived failure in the debut of China's banking system on world capital markets would mean a loss of face at home, and probably political death. Fund managers, by contrast, have only money to lose. |
