Chinese Bank IPO Raises $9.7 Billion

Facing down recent convulsions in global stock markets and long-held qualms about China’s financial sector, state-owned Bank of China raised $9.7 billion Wednesday in the world’s largest initial public offering in six years.

Interest in Bank of China, the nation’s second-largest by assets, was so intense that demand for the shares was about 80 times the amount made available to investors. Billionaire Saudi Prince Alwaleed bin Talal issued a statement confirming that his investment company bid $2 billion for a 2.7% stake in the Beijing-based bank.

The success of the stock offering wasn’t surprising given China’s booming economy, analysts said Wednesday. In October, China Construction Bank raised $9.2 billion in an IPO. Since then, its shares have risen about 44% on the Hong Kong Stock Exchange.

Bank of China’s business is more diverse and international than China Construction Bank. About 25.6 billion Bank of China shares were priced at 38 cents, near the top of the target range of 32 cents to 39 cents. Trading will begin June 1 in Hong Kong.

Chinese banks are being supported by the nation’s robust economy, and a downturn could expose weak spots that are hard for investors to see now, said Nicholas Lardy, a China expert and senior fellow at the Institute for International Economics in Washington.

“They may be shortsighted,” he said.

For the near term, China’s economic machine is expected to run full steam, powered by exports and foreign investments. China’s economy surged 10.3% in the first quarter from a year earlier. Its banking sector hopes to ride the momentum by selling shares -- thanks to the herd of investors captivated by anything China, as some analysts see it.

Industrial & Commercial Bank of China, the largest of the four big state-owned banks, is expected to net at least $10 billion in an IPO this year. “There is a frenzy for China IPOs now,” said Andy Xie, an economist with Morgan Stanley in Hong Kong.

China’s global economic muscle is attracting massive investment in other sectors as well. China Mobile was close to buying Millicom International Cellular of Luxembourg for about $5 billion, the Wall Street Journal reported Wednesday. If completed, it would be the biggest foreign acquisition by a Chinese company and would give China Mobile access to millions of customers in other developing countries.

In Hong Kong, the heavy demand for Bank of China’s shares contrasts sharply with the investor jitters that seem to be spreading. Emerging markets, typically the first to feel the effects of global stock tremors, have taken a drubbing in recent days amid worries that rising interest rates could slow growth.

But investors clamoring for Bank of China shares seemed unfazed by Chinese banks’ historical problems with corruption and bad debts. In recent years, Bank of China has been hit with a number of scandals involving bribery and embezzlement by managers and employees.

Chinese lenders have struggled to improve the quality of their loan portfolios. The central government has provided tens of billions of dollars to prop up state banks hobbled by lax lending practices. Bank of China said in its stock literature that its proportion of bad loans fell to 4.9% at the end of last year from 5.5% a year earlier. The new figure is about double the U.S. average.

Even so, analysts question the accuracy of such figures and say they can’t be sure there has been significant improvement in the quality of credit checks and lending. Chinese banks, though, are pushing to strengthen their finances and management in preparation for stiffer competition when restrictions on foreign banks operating in China are loosened at the end of this year.

The Bank of China IPO comes as foreign financial institutions have a robust appetite for China’s banks. Bank of America, Royal Bank of Scotland and Citicorp are among those that have taken stakes, hoping to expand their foothold in a promising market.

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Mega IPOs

The Bank of China raised $9.7 billion in its initial public stock offering. Here are some milestone initial offerings around the world of recent years.

(In billions)

Enel, Italy 1999: $16.5

AT&T; Wireless 2000: $10.6

Bank of China 2006: $9.7

Kraft Foods 2001: $8.7

UPS 1999: $5.5

Infineon 2000: $5.2

China Unicom 2000: $4.9

Conoco 1998: $4.4

Sources: Renaissance Capital, Bloomberg News