A demonstration of strength: the upcoming IPO of China's AgBank

The Chinese love records. The initial plan was that the IPO would raise 30 billion US dollars for the Agricultural Bank of China (ABC or AgBank for short), the third largest Chinese state bank. But as the financial markets have been shaky recently, the AgBank is now likely to receive "only" 22.1 billion dollars. This would still be more than the biggest IPO of all time so far, the 21.9 billion dollars resulting from the launch of the Industrial and Commercial Bank of China in 2006.

The exact figures don't really matter, though, argues Andreas Schmitz, the president of the Association of German Banks: "It will be a fabulously large amount of money and a huge success anyway that they are able to go ahead with the listing in these troubled times. I don't think you could go through with a bank IPO in Europe or the United States right now."

State banks successfully reformed

The IPO also marks an end to the reform of China's state banks. The central government had to pump billions into the banks to relieve them of the burden of bad loans. The Agricultural Bank was considered the weakest among the four, which is why its IPO is coming last. State assistance helped reduce the share of bad loans in the AgBank portfolio from 24 to 3 per cent between 2007 and 2009.

The bank has 23,000 branches, more than any other in the world, and 320 million customers. They are mostly based in China's rural areas, as the name already suggests. China's plans to boost rural development might appeal to potential investors.

But on the other hand, the Agricultural Bank will have to continue offering loans at low interest rates to Chinese peasants. This political directive once again highlights the dilemma Chinese state banks find themselves in: They are expected to become more efficient and earn more revenues, while at the same time toeing the party line.

Attractive for investors

Andreas Schmitz says with the IPO at this juncture, the government in Beijing is sending a clear signal to the world: "First of all, that the Chinese economy is developing very well. That it is continuing to open up to financial markets and managing to attract capital for its banks from outside as well, not just from the state, which in turn makes these banks more attractive."

The Chinese media have reported that a number of high-profile investors have agreed to buy substantial shares in the AgBank. Among them are state funds from Kuwait and Qatar. Singapore's state fund, Temasek, is planning to invest 300 million dollars. Major Chinese companies are also said to be participating, including the largest oil and gas producer PetroChina and insurance giant China Life.

These strategic investors will be crucial, as most observers believe that private investors might be reluctant to take the risk. After almost doubling in 2009, the Shanghai Composite Index has lost more than 20 per cent in value in 2010. And whereas the AgBank listing is going ahead with strong government backing, five companies have already had to cancel their IPO plans during the past two months, including China's second-largest wind turbine maker, Xinjiang Goldwind.

Author: Zhang Danhong / tb
Editor: Grahame Lucas