Mother of all IPOs skates on thin ice

Equity markets around the world may have tanked in recent weeks, but authorities in China audaciously stuck to their plans for the “mother of all IPOs” — of China’s biggest bank by number of customers. And although the “success” of the IPO from the Agriculture Bank of China — which could be the world’s biggest, at $22.1 billion — was virtually underwritten by sovereign wealth funds from West Asia and other strategic investors, analysts believe the risks for investors lie in the future.

On Wednesday, authorities confirmed that the IPO would be priced in Shanghai at 2.68 yuan a share, the top end of the price band; at that price, the IPO will raise $10.1 billion in Shanghai.

Taken with the dual offering in Hong Kong, where the shares are priced at HK$3.20 each, and an expected 15% “greenshoe” overallotment option, the IPO could raise $22.1 billion, even higher than the $21.9 billion raised by the Industrial and Commercial Bank of China (ICBC) in 2006.

The success of the IPO was never in doubt, even given the headwinds buffeting the equity markets in China and around the world, and despite the fact that the pricing “did not reflect the bank’s fundamental strengths and weaknesses,” say analysts.

Given the “noodle soup” of cross-holdings by the Chinese government and other banks, and the fact that the IPO was intended by the government as much a “political” statement of confidence in the China growth story, strategic investors ensured that the Shanghai portion of the IPO was oversubscribed more than 10 times.

Among the strategic investors were China’s largest insurer, China Life Insurance; China State Construction Engineering; and Anshan Iron and Steel Group.  

Sovereign wealth funds from West Asia and other institutional investors also lent a substantial hand, more to generate goodwill with Chinese authorities than because they saw Agricultural Bank as a promising investment: the Qatar Investment Authority pledged nearly $3 billion; the Kuwait Investment Authority pledged nearly $1 billion; and even Standard Chartered pitched in nearly $500 million.

But analysts believe the issue prospectus very likely understates the risks to Agricultural Bank’s books arising from the rash of reckless lending from Chinese banks last year, particularly to local government investment vehicles, which are expected to turn bad. Under government direction to ramp up lending after a collapse in the export sector, Agricultural Bank new loans soared by a third last year.

The risk that a substantial portion of those loans could turn bad has been elevated in recent months, following a sharp fall in property prices as part of the government’s efforts to deflate a monstrous asset bubble in the property market.

That’s because much of the lending to local government investment vehicles is against property as collateral, and any fall in property prices, while necessary to prevent a property bubble from inflating further, could render many of those loans unserviceable.

Some economists and analysts have warned of a banking crisis —- or at least a shock to the system —- in that event. For all the success of Agricultural Bank’s “world’s biggest IPO”, that’s a risk that will eventually be borne by investors, they point out.