China is full of surprises. So is the initial public offering of its largest, but underperforming, rural lender, the Agricultural Bank of China (ABC). Everybody was expecting the US$22 billion deal to flop. But it didn't. The offering was oversubscribed and priced at the mid to high end. How?
Bankers involved in the deal talk about the impressive management and the three round-the-globe roadshows. Some long funds see the existing deficiencies as a future upside, while some hedge funds are betting on the under-valuation of mainland bank plays.
All this may be true. Yet, the role of the state overshadows all.
Let's start with a revealing episode early last month. The bank was scheduled to launch its mega offering within weeks. But international markets were going down and people were already betting on a delay of the listing. Then an interesting article turned up in an influential mainland magazine. It quoted sources from the bank's major shareholders - the Ministry of Finance and Central Huijin Investment - questioning whether the bank should go ahead with the listing.
'There is no urgency,' a person from Huijin said, according to the report.
'The listing can be delayed,' a ministry official was quoted as saying.
I can still remember the good laugh I got from a mainland investment banker, who was not involved in the deal, when I mentioned the report.
'It's not about delay. It's about getting state-owned enterprises (SOEs) to chip in,' he said. At the same time, he added, 'should the deal turn sour, the report will serve as a disclaimer of responsibility, i.e. 'I told you so.''
Here is the logic. The State Council approved both the listing and the timing of ABC's offering. There is no backing down. It is the job of the bank's management and the major shareholders to get it done. But, given the poor market conditions, it is almost impossible to complete the deal if various state enterprises do not chip in to help with the fund-raising. But SOEs come under the State-owned Assets Supervision and Administration Commission, not the Ministry of Finance, which must get the deal done.
The only way to get SOEs to open their purse is to show the State Council, which is above all, that the deal will be a very tough sale. A public exhibition of hesitation by the major shareholders serves that purpose. The State Council will then put pressure on SOEs to support the deal.
That's what mainlanders call 'scare tactics'.
How true is this scenario? I don't know. All I can see is the dominance of the state factoring into the ABC subscription.
So-called strategic investors took up 45 per cent of its H-share offering and 40 per cent of the A-share offering. The former went mainly to the sovereign funds of China-friendly states, while state-owned enterprises took up the latter.
Their 40 per cent share exceeded the record of other big bank IPOs - 18 per cent for Industrial and Commerce Bank of China and 19.8 per cent for Bank of China.
Twenty-seven state-owned enterprises chipped in a total of 27.4 billion yuan (HK$31.4 billion) for ABC. This does not include the US$350 million paid by two other SOEs to become the bank's H-share strategic investors.
All except four of the SOEs are owned by the central government, as opposed to provincial or regional ones. Among them are insurers, tobacco companies, electricity suppliers, food producers and carmakers.
Sure, we can't just assume that they all acted on state orders. They may genuinely find ABC a good investment, despite the fact that its numbers compare poorly with its peers' and it is priced at only an 18 per cent discount to them.
I wasn't able to talk to any investors to understand their reasoning, but an unscientific, yet telling indicator, is the subscriptions of so-called 'corporate investors'. And that signals little commercial interest.
Corporate investors, in the case of an SOE's offering, is a misnomer. It actually refers to 'friends, families and influential people' - powerful people whose interests cannot be ignored. With personal money at stake, this is the genuine indicator. In a hot deal, their buying orders can amount to more than 10 per cent of the total subscription. But it doesn't come close to 1 per cent in the ABC deal, according to bankers.
But I hear some of you objecting. You're saying that powerful central SOEs do not have to take every order handed down from the State Council.
True, but there are political favours to return. Remember, the Ministry of Finance deals with the SOEs on a daily basis on various important issues, like tax exemptions.
There may also be a risk-free guarantee for these big institutions. In 2005, there were meetings in which ministry officials asked central government-owned enterprises to 'support' various mutual fund subscriptions. The ministry promised to deduct any loss suffered from their future financial obligations, one participant said.
In short, profit for you and loss on me. That's not too bad a deal, right?
You may wonder what the point of the whole exercise is if this IPO is just a transfer of state funds from one pocket to another. There is a lot of benefit in that. To the government, the listing of a major state-owned enterprise results in a significant inflation of the value of a state asset.
What's more important, there's now pressure on that corporation to reform. Beijing has more than once said that shareholder pressure was one of the best ways to prepare SOEs for the international competition to come.
For a cash-rich country like China, the money involved is not an issue. The most important thing is getting ABC listed.