There was no shortage of fanfare as Agricultural Bank of China (ABC; 601288.SH, 1228.HK) completed its long-awaited dual listing in mid-July. Despite concerns over the market’s appetite for new issues, ABC easily raised US$19.2 billion in Hong Kong and Shanghai and was set in mid-July to exercise its overallotment option in Hong Kong and set a new IPO record of US$22.1 billion.
But ABC’s IPO deserves attention for more than its blockbuster status. It represents a potential triumph for China’s banking system, but also reflects uncertainties about financial fragility both within China and internationally.
After escaping a flood of bad loans at the end of the 1990s, China’s banks have been recapitalized and reformed by the government into entities worthy of public listing. Four years ago, foreign financial institutions Goldman Sachs (GS.NYSE), Allianz Group (AZ.NYSE, ALV.FWB) and American Express (AXP.NYSE) couldn’t get enough of ICBC’s listing. Their investments paid off in the depths of the financial crisis as sales of shares of ICBC and other similarly resilient Chinese banks provided a source of quick cash.
In ABC’s case, it remains to be seen whether good things will come to those who wait. No major foreign investment bank has taken a strategic position in ABC, considered the weakest of China’s four big banks. However, with China’s largest network of retail banks and 320 million individual clients, ABC will be among the first to benefit from an increasing focus on inland investment; this was a major draw for cornerstone investors like Standard Chartered (STAN.LSE, 2888.HK) and Archer Daniels Midland (ADM.NYSE).
Still, ABC would likely have preferred to wait until economic conditions improved. In the face of global uncertainty and talk of domestic tightening, the Shanghai Composite Index has fallen more than 25% this year, and more than two-thirds of China’s large-cap IPOs in 2010 have fallen below their initial prices.
Plans by ABC’s listed rivals for new share issues to meet stricter capital requirements could further test the market.
All eyes will now turn to ABC’s post-IPO performance as a sign of the health of China’s capital markets. If ABC’s stock price remains above its listing price, it will demonstrate faith in the health of China’s banking system, despite last year’s US$1.4 trillion in new loans. If it falls, then either ABC’s float has overwhelmed the market, or China’s banking system isn’t as reformed as it might like to pretend. Neither would bode well for the stock market or the domestic economy.