The mainland government has not had a great deal of success in its attempts to get small banks to tap stock markets The mainland's latest effort to encourage small banks to tap the domestic stock market for capital is likely to end on a subdued note, with the debut of Huaxia Bank on the Shanghai exchange today expected to draw a moderate investor reception. Analysts expect the Beijing-based lender, already mired in controversy, to trade between 6.5 yuan (HK$6.09) and 8.5 yuan on its first day. The range, a 16 to 51 per cent premium above its initial public offering (IPO) price, shows a modest gain by mainland standards. Huaxia, China's 11th-largest lender by assets in 2001, launched one of this year's largest A-share offerings last month to boost its capital base by selling one billion shares, or 28.57 per cent of its issued share capital, at 5.6 yuan each, or 19.86 times last year's earnings. Straining in its bid to re-capitalise the big four state-owned commercial banks, the central government has in recent years encouraged smaller, better-managed lenders, which are less burdened with bad debt, to tap the capital market for funds. The intention is to strengthen the lenders ahead of full-fledged foreign competition after 2006. Analysts widely expect Huaxia's debut performance to fall short of the 70 per cent to 100 per cent gains which are not uncommon on the first day of trade of a mainland IPO. 'People hold divergent views on this company,' China Merchants Securities analyst Lu Weiqiang said. 'It is weak on both internal management and earnings.' By total assets at the end of last year, Huaxia ranked behind the three Shanghai-quoted banks - Shanghai Pudong Development Bank, China Minsheng Banking Corp and China Merchants Bank - and just ahead of Shenzhen-listed Shenzhen Development Bank. Huaxia's first-half core operating revenue and profit was the second weakest among the five. Formerly the banking department of Capital Steel Group, Huaxia saw its loan exposure to the state-owned giant - which remains its largest shareholder - at 14.01 per cent of net capital in June, in breach of a mainland rule capping bank lending to a single shareholder at 10 per cent of net capital. Citing Huaxia's account adjustments, mainland publication Securities Market Weekly last weekend accused the lender of significantly inflating its 2001 net profit by manipulating the accounting treatment of its non-performing loans (NPL) and loan-loss provisions. Huaxia's NPL ratio, at 4.79 per cent by June, is among the lowest reported by Chinese banks, though Western analysts believe Chinese NPL figures hugely undercount dud loans. Although the accusations were not always backed by hard evidence, Mr Lu said the article reinforced existing perceptions of weak asset quality and management. Yangtze Electric Power Corp's delayed 10 billion yuan IPO, previously scheduled for launch this week, could help Huaxia's debut performance, analysts said. But several recent stock debuts had received cool receptions from investors who were concerned about a recent spurt of share offers squeezing liquidity, Xiangcai Securities trader Tang Yong said. In addition, the tendency of mainland companies to report a quick downturn in earnings shortly after listing was also a concern. Huaxia's debut could unleash another round of selling in the other four banking stocks as punters take a gloomy view of banking results in the wake of recent regulatory changes, he added. There also is concern the increase in official reserve requirements for mainland banks from 6 per cent to 7 per cent from September will hurt earnings of Chinese lenders, which rely mostly on interest income for revenue.