Unless it continues into this week, Friday's sharp sell-off in global stock markets should not significantly dampen demand for shares in Bank of China's initial public offering. But, with an increasing number of analysts warning that asset markets may be at or near their peak for the current cycle, some financiers are questioning the wisdom of buying stock in a Chinese bank at what looks like the top of the market. On Friday, just one day into marketing the institutional tranche of BOC's offering, bankers were already claiming that the giant issue was comfortably oversubscribed. With massive demand forecast for the retail offering, which kicks off this week, most observers had expected the deal's sponsors to price the shares at the top of their indicative $2.50 to $3 range to raise $88 billion. Those ambitions may now be scaled down slightly after jitters over interest rates, inflation and the precarious state of the US dollar helped knock 1.4 per cent off the value of the Hang Seng index on Friday. With choppy trading conditions likely over the next two weeks in global markets, BOC's investment bankers may opt to price the shares a little more modestly to ensure some extra support for the stock when trading starts on June 1. Barring a full-scale rout in world equity markets, however, prospective buyers of Bank of China shares are unlikely to prove excessively price-sensitive. Many will feel they cannot afford to miss out on this deal after shares in China Construction Bank soared more than 50 per cent after its $72 billion share sale last October. Today, Construction Bank shares are trading at 2.88 times book value. BOC, with its shares set to be priced at between 1.9 and 2.2 times book value, looks like a bargain by comparison. Potential investors have been reassured by BOC's extensive restructuring efforts. Following successive bail-outs from China's financial authorities worth an astonishing 588 billion yuan since 1998, the bank had cut its non-performing loan ratio to just 4.6 per cent of its portfolio by the end of December, down from nearly 17 per cent two years earlier. To bolster sentiment further, BOC has lined up the usual parade of high-profile investors. In addition to a consortium headed by the Royal Bank of Scotland, which bought 10 per cent of the bank last August, Li Ka-shing, Henderson Land's Lee Shau-kee and Japanese banking giant Mitsubishi UFJ have all agreed to buy sizeable stakes in the offering. Meanwhile, BOC is making strenuous efforts to diversify its business away from lending to China's state-owned manufacturing sector. Consumer lending made up 20 per cent of the bank's loan portfolio last year, with its mortgage lending business growing fast. Goldman Sachs, one of BOC's lead managers, forecasts the bank's net profits will rise an impressive 40 per cent this year. Even so, there are plenty of danger signals. BOC's management remains largely opaque. And although it has cut its headline non-performing loan ratio, the bank has yet to show it has overhauled its credit risk management procedures to ensure the loans it is making now do not turn bad in the future. In addition to the loans classed as non-performing, a further 12.7 per cent of BOC's portfolio is rated as 'special mention' or likely to turn bad if economic conditions worsen. Given fears of overinvestment and overheating in the Chinese economy and rising concern about slowing global growth, some investors are raising doubts about the offer's timing. 'I have to ask myself if I really want to be buying into a Chinese bank at the top of the investment cycle,' says one portfolio manager. 'As long as the party is still going on, things will look fine. But when the music stops, problems will appear in the Chinese banks.' If global markets slide further this week, more investors may find themselves asking similar questions.
