HONG KONG: The first of two of the world’s biggest initial public offerings (IPOs) this year, from the Bank of China (BOC), is to open in Hong Kong in mid-May, amid concerns that the core of China’s banking system, which is being opened up for disinvestment, may be more rotten than had been believed.
 
BOC’s offering - of up to $8 billion - is expected to open on May 18; the float will make it only the second of the Big Four state-owned Chinese banks to list in Hong Kong, after China Construction Bank (CCB), which went public last year. Another mega IPO, a $12 billion offering from Industrial & Commercial Bank of China (ICBC), is due later this year. Between them, the two IPOs are almost certain to go down as the year’s biggest stories in the financial sector in the region.
 
BOC, which is China’s oldest bank, is expected to offer over 20 billion so-called H shares, or about 10% of its enlarged share capital, to institutional and retail investors as the first step in a dual-listing plan. It is then expected to issue an unspecified number of A-shares in the domestic market over the next 15 months.
 
The listings are part of a process to infuse capital into China’s creaking banking system, and subject the notoriously ill-managed sector to the stern glare of scrutiny from shareholders and regulators alike. Decades of complying with government (and party) directives to lend to unprofitable and vanishing entities have left the financial system with a huge burden.
 
Just last week, audit firm Ernst & Young revealed that the Big Four state-owned banks - ICBC, BOC, CCB and Agricultural Bank of China (ABC) - were carrying $358 billion in bad loans; that estimate is nearly thrice the officially disclosed figure. Overall, the E&Y annual report on the global bad loan market noted, China’s financial system is carrying non-perform loans of about $900 billion; at that level, that mountain of bad debt is the world’s biggest and is marginally higher than China’s considerable foreign exchange reserves. E&Y cautioned that more bad assets may come to light as lenders make new loans and the property market overheats. BOC has in recent times been embroiled in a succession of scandals; in the most recent instance, two former managers of the bank have been charged in the US with siphoning off nearly $500 million.
 
Clearly, China faces a grim challenge in getting the Big Four to clean up their books and get professional management and lending systems in place by year-end when, under the terms of its accession to the World Trade Organisation, it is required to lift restrictions on overseas banks operating at home. These mega-buck IPOs will certainly help tone up the banks’ financial muscle and prepare them for competition, but there’s increasingly a feeling that they’ll need rather more than money power to keep on going.
 
Clean-up time
 
The $8 billion IPO of BOC, China’s oldest bank, is expected to open on May 18
 
Industrial & Commercial Bank of China (ICBC)’s $12 billion offering is due later this year
 
The Big Four state-owned banks are reported to be carrying $358 billion of bad loans — thrice the officially disclosed figure