Politics outweighs business in listing a state enterprise
To be or not to be ...
The market has been wondering whether China will go ahead with the flotation of its last unlisted state-owned commercial bank - Agricultural Bank of China (ABC).
From a business perspective, the question is more than valid.
Investors are concerned with the deterioration in credit quality among mainland banks. The numbers from ABC, which compare badly with those of its peers, offer little comfort.
Meanwhile, its rivals will be offering billions of shares later this year. These would not hurt much during a bull market, but the United States and Hong Kong stock markets have lost more than 10 per cent from this year's peaks, and the clouds over Europe remain thick and dark. On top of this, the month-long World Cup has just started.
The logical answer is for ABC to wait for a better opening. Unfortunately, that is not the right answer. This is because the business perspective is rarely the rule when it comes to share sales of state-owned enterprises.
I am not saying this based on any inside knowledge; the record speaks for itself. In the past decade, state-owned enterprises have bowed to hostile market conditions without putting up a fight.
In October 1997, the Asian financial crisis had just begun when the country launched the first offering of its phone operator, China Mobile, aiming to raise US$4.2 billion.
In 1999, the market had yet to recover from the crisis and oil prices had plummeted to US$21 a barrel, yet the country kicked off the US$2.5 billion sale of its first oil producer, CNOOC. The response was poor. The deal was withdrawn. It returned 18 months later at less than half of the target size.
In 2002, the internet bubble had burst and telecommunication firms were going down one by one when the country's second-largest fixed-line operator, China Telecommunications Corp, went ahead with its US$3.2 billion listing. Response was poor. The deal was withdrawn. Three weeks later, it came back at half of the target size.
Any banker will tell you that a relaunch is bad marketing. So why choose such a strategy?
Well, unlike private enterprises, each and every detail of the listing of a state-owned enterprise is decided by the government instead of management, be it the call to list or not, the structure, the timing and the floor pricing.
It is a process that involves more than 20 steps, going through the State Council and a handful of ministries. Each step is about political manoeuvring and compromise.
Once the plan is out, it is difficult to change. In the case of CNOOC's first offering, Wei Liucheng, the then chairman who was on a roadshow in New York, had to file a late-night report to the State Council to get permission to suspend the offering. Any change results in the re-opening of a political fight. CNOOC could not launch its offering until early 2001, after its two big rivals had completed their share sales, sucking hundreds of billions of dollars away from the market.
Any delay reflects poorly on the management's ability. Wei, a tested businessman and politician, has told the press how he cried over the decision to call off the deal and ever since has refused to enter the Four Seasons Hotel in New York, where the call was made.
Any delay will also jeopardise much needed reforms within a corporation. While private enterprises go public for the money, central SOEs have their eye on something more important - the impetus of internal reform and being shielded from unnecessary government intervention.
'It requires more political courage to delay an offer without making an attempt to brave it out against a hostile market,' said a veteran investment banker. After all, it's much easier to cope with a bad market.
All these political considerations have come into play in the case of ABC. Its listing has never received a consensus at the top. There have been heated debates on whether the bank would better serve the country's agricultural reform as an efficient listed entity or an obedient non-listed one.
The timing of its offering is no less a political compromise. Its three rivals - Bank of China, Industrial and Commercial Bank of China and China Construction Bank - have announced plans to raise a total of HK$250 billion this year to strengthen their balance sheets. They have been holding back on their equity issues to make way for the ABC offer.
Should ABC decide to pass, there is no doubt that it will be pushed to the end of the queue, and an offering next year will be no less challenging. By then, investors are likely to be loaded with mainland bank shares, interest rates are likely to go up and loans will be turning bad.
With the highest cost-to-income ratio and bad-debt ratio among the country's top four banks, ABC needs the listing to implement reforms and for the capital impetus to survive the coming winter.
Mind you, its chairman Xiang Junbo, a war hero, is only 53 years old. He is relatively young in Beijing's corridors of power. It's hard to imagine how this fighter on the battlefield will let a delay in listing hinder his political career.
Unless there is a major meltdown in the domestic and international stock markets, he is sure to brave the strong winds before coming up against bearish investors.
In the meantime, you may keep hearing that this or that ministry is pressing for the offer to be delayed.
Because when it comes to such disclaimers, mainland bureaucrats are masters.