Great analysis on ICBC and Chinas banking industry:
The Industrial and Commercial Bank of China (ICBC) is expected to raise nearly $22 billion in an initial public offering (IPO) — the largest in history — after shares are made available to retail investors Oct. 27. The ICBC offering is the latest in a series of IPOs involving Chinese banks, into which Western investment firms have poured billions since 2005.
What is surprising about the expectations for the ICBC offering is not only the tremendous amount of cash likely to be raised, but the fact that it comes only months after a number of major global accounting firms began taking note of serious structural weaknesses (“An Inflection Point in China’s Banking Problem, Stratfor Article) in China’s financial system. It may be recalled that, in early summer, a series of reports were issued by Ernst & Young, PricewaterhouseCoopers, McKinsey Global Institute and Fitch concerning the problem of nonperforming loans (NPLs) and questioning the long-term stability of the Chinese market.
These reports, we noted, aligned with a long-standing Stratfor forecast as well; the structural weaknesses have been apparent and widely discussed in the Chinese press for years. What is curious, then, is not why mainstream accounting firms and consultancies suddenly began to question the prospects of China’s economy, but rather why foreign investors are continuing to pile into the state’s banking industry regardless.
The simple answer, of course, is “irrational exuberance.” The shine of a market that services 1.3 billion people — and a chance to carve out a piece of that for oneself — is difficult to ignore. But there is more to be considered: China has gone to considerable lengths to generate the impression that the systemic weaknesses are being addressed and to make its banks (and other state industries) appear attractive to foreign investors. It is no accident that a spate of banking IPOs — Bank of Communications ($1.6 billion raised), China Construction Bank ($8 billion), Bank of China ($11.2 billion), China Merchants Bank ($2.6 billion) — have been announced since June 2005. It also is no accident that ICBC, one of China’s “Big Four,” is going public at this time — as the transition period for full World Trade Organization membership is drawing to a close.
Posted: October 27th, 2006 under Asia, Emerging Markets, General.
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