China Review: Agricultural Bank of China IPO Tests Market Appetite of Bank Stocks

Doubts and scepticism about the IPO of Agricultural Bank of China (ABC) subsided as pricing details emerged last week. The H-shares of the bank to be traded in Hong Kong, are priced at HKD 3.2 per share, in the middle of the pricing range. Meanwhile, its A-share stocks, to be traded in Shanghai, are priced at the top of the range, at CNY 2.68 per share. The dual listing is expected to raise more than $19 billion for ABC, not counting over-subscription. It is not yet clear whether the IPO will surpass the record currently held by rival bank ICBC, which raised $22 billion in 2006.

Scepticism about ABC's IPO is not unjustified. ABC is the last major state-owned Chinese bank to go public, and is widely believed to have a weaker balance sheet and less attractive growth prospects given its mandate to support China's vast rural economy. The IPO did not come at the best time either: China is the worst-performing market in the world so far this year, down 27% from the end of last year, on concerns of slack export orders and slowing fixed asset investment.

However, the naysayers are missing the bigger picture. As China restructures its economy to encourage consumption, inland area development, and urbanisation, ABC has a key role to play in the process. Boasting thousands of outlets in far-flung areas of rural China, the bank outnumbers its other state-owned peers (which have most of their branches in the urban areas) and has stronger connections with the rural communities. By bringing ABC public, China is determined to bring in not only capital, but also better transparency and management to the bank, so it can become a healthier and more stable financial institution to serve its rural clients. After the IPO, Chinese government remains the largest shareholder of the bank.

Market Recap

Investors returned to the Chinese stock market last week as many believe the market is in oversold conditions after an extended slump brought PE multiples down to an 18-month low, and narrowed the valuation gap between stocks traded in Shanghai (which is subject to capital control) and in Hong Kong. Comments from the central bank last week also led investors to believe that China will likely soften its stance on tightening in the second half of 2010. The Shanghai Composite Index rose 3.7% to 2,471 over the past trading week, while the Shenzhen index rose 6.4% to 9,817.

Macro and Industry Updates

China Raised Japanese Treasury Holdings in May

According to official statistics, China purchased a total of 735.2 billion yen ($8.5 billion) in Japanese treasuries in May, compared to its purchase of 198 billion yen in April and 31 billion yen last May. In fact, the May purchase exceeded the total of 541 billion yen China reported for Japanese treasuries purchased in the first four months of 2010. Short-term debt maturing within one year accounts for the bulk of Japanese treasuries that China has bought this year. In 2009, China sold a net of 78.7 billion yen in Japanese treasuries. As of March this year, the country's foreign currency reserve stood at $2.4 trillion, of which about 10% is believed to be Japanese Yen-denominated assets.

China Development Bank Made Mizuho a Co-lead Underwriter for a $400-million Bond Offering

Since China opened up the bond underwriting market last July, this is the first time that a foreign lender is acting as a co-lead to underwrite a bond offering of a major Chinese bank. Mizuho will underwrite about a third of this offering, which is denominated in US dollars. HSBC, the first foreign lender to participate in bond underwriting in China, was a member of the underwriting consortium for Chinese yuan-denominated bonds issued by the Bank of Shanghai last November.

Carrefour Closed Only Store in Xi'an

French supermarket giant Carrefour will shut down its only store in Xi'an, a major city in western China, five years after the store was opened. This marks the first store closure for Carrefour in its 15-year history in China. In 2009, rival Wal-Mart surpassed Carrefour for the first time in the number of total stores in China. Wal-Mart has 180 stores in 94 Chinese cities, compared to approximately 150 stores run by Carrefour.

Corn Prices Hitting Record High in China

Corn prices rose to a 10-year high recently, as corn processing companies pushed up prices significantly for fear of a supply shortage caused by last year's severe drought in China's northeast. Reports of a recent jump in corn imports to China, which normally can satisfy demand with domestic production, further fanned fear of a shortage, and led farmers to hoard their produce in anticipation of better prices. Prices remained at elevated levels even after the government stepped in by selling corn reserves. China consumes about 150 million tons of corn each year.

Contributions from Iris Tan and Zhao Hu.

This is an edited version. The article originated from Morningstar.com.au.