January 09, 2007
As I've blogged about before, Industrial and Commercial Bank of China went public last October in the largest IPO in history, selling $22 billion in stock. And despite the mammoth size of the offering, it was oversubscribed by well over $300 billion. How are these IPO shares doing?
Pretty well, it seems. Trading in ICBC, as well as the stock of two other major Chinese banks that went public in the last year or so (Bank of China and China Construction Bank) has been going great guns on the Hang Seng, Hong Kong's stock market. ICBC stock has returned 26.8% in US dollar terms since last October, and China Construction Bank has produced a total return of 72.2% since its $9 billion IPO in October 2005.
These majority state-owned institutions are hardly models of good governance or accounting transparency. Why are investors going gaga? A recent Fortune article explains that the big US and European banks are buying stakes in Chinese banks as part of a larger strategy to gain access to China's retail market for financial services. Foreign banks aren't allowed to sell retail banking services in China, and foreign ownership of local banks is generally limited to 25%. As a result, state-controlled banks dominate the retail market. That market is a worthy prize for Western banks--1.3 billion people, $2 trillion in household savings, and only 20 million credit card holders so far.
Will Chinese bank stock prices continue to climb? (This is not investment advice, BTW; I just know what I read). Their P/Es are pretty high now, about twice those of Western banks. OTOH, China's banks are modernizing, and they're backed by the government, which wants a strong retail banking sector anchored by local banks.
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1. Posted by D. Daniel Sokol on January 11, 2007 @ 7:59 | Permalink
Wouldn't you invest in a company that at present has no antitrust liability and has the potential to extract monopoly rents from pricing above a competitive price in the near to medium term? China lacks an antitrust law, though change may be on the way as soon as this year. Even with such a law, assuming no explicit or implicit exeption for the banking sector, priorities will be in other areas such as cartels.
Various public restraints (e.g., restrictions on foreign ownership), state support and state aids for these banks also shields such banks from international competition.
2. Posted by Fred Tung on January 11, 2007 @ 11:38 | Permalink
I guess that's right as far as it goes--a lot of factors suggest the deck is stacked in favor of the domestic banks. But the question is how do you price all that? I doubt if any pure investor (who's not trying to leverage its stake into market access) has a model for that.
3. Posted by China Law Blog on January 22, 2007 @ 0:43 | Permalink
If I were looking to invest in Chinese banks (or any other Chinese company for that matter), I would be far more concerned with the transparency issues than a possible (but I think at this time not very likely) antitrust law.
