Chinese bank launches potentially record-setting IPO to raise capital after lending boom
This week’s $19.2-billion initial public offering by the Agricultural Bank of China is part of a capital drive by China’s banks stemming from last year’s lending boom.
Chinese banks unleashed a flood of credit to stimulate the economy, totaling $1.4 trillion in 2009. That lending powered economic growth during the global recession. But it also raised fears of rising bad loans — mainly to local governments — that could destabilize the banking system.
The surge has forced Chinese banks to boost their capital adequacy ratios. China’s top five banks are set to amass $55 billion in new capital, including Agricultural Bank’s public offering.
“The banks are being cautious,” said Deng Ting, a banking analyst for Guodu Securities in Beijing. “At the same time, they need enough capital to continue issuing more loans to make a profit. Last year’s record lending required a lot of money.”
Strengthening China’s banks is crucial with signs emerging that the nation’s economy is slowing. The government has been tightening standards for real estate loans to cool the nation’s white-hot housing market. Manufacturing activity has declined because of slackening foreign demand. And the Shanghai composite index at China’s leading stock exchange hit a 15-month low to start the week.
As a result, Agricultural Bank’s IPO on Tuesday may have come at an inopportune time, analysts said. Forecasts had projected potential proceeds at around $30 billion. So far, the bank has sold $19.2 billion of stock on exchanges in Shanghai and Hong Kong.
But the offering could grow to $22.1 billion if underwriters exercise their right to issue additional shares. If that happens, the Agricultural Bank IPO would be the largest in history, eclipsing the $21.9 billion raised by the Industrial and Commercial Bank of China in 2006.
Agricultural Bank, which has 320 million retail customers and a mandate to serve the nation’s countryside, is the last of China’s so-called Big Four state banks to go public. It’s also considered the worst performer. The institution hasn’t reaped the benefits from China’s breakneck urbanization. And it has been racked by fraud. The central government has invested billions of dollars over the years to recapitalize the bank and rid its balance sheets of sour loans.
Particularly worrisome to some analysts are the tens of billions that Agricultural Bank and other Chinese banks lent recently to local governments.
Chinese villages, cities and counties receive little financial assistance from Beijing. Therefore many local governments have set up special investment vehicles that allow them to borrow from banks to finance public works, using government land and other assets as collateral. These investment companies mushroomed to an estimated 8,000 last year after the central government ordered a massive stimulus to boost economic growth during the global downturn. Infrastructure investment was a huge component of that effort.
But the health of many of those investment companies is suspect, in part because local governments don’t have to disclose them on their books. Repayment of many of those loans is dependent on the success of a particular project or the continued rise in government land sales to property developers.
Outstanding loans to these special investment vehicles surged to $1.08 trillion by the end of 2009, up 70% from the previous year, according to the China Banking Regulatory Commission. But one independent estimate has put that figure closer to $1.6 trillion, the equivalent of one-third of China’s gross domestic product last year.
Regulators have since closed some of these underperforming investment vehicles, increased collateral requirements and stepped up audits.
Some experts believe that the threat has been overstated and that policymakers have been too heavy-handed, derailing projects that could have produced jobs and contributed to China’s economic expansion.
“It is unlikely that the local government’s debt troubles will turn into a debt crisis, thanks to the government’s fast-growing fiscal revenue, the large scale of state-owned assets, and the fact China is in a better fiscal situation compared with major advanced economies,” wrote Ha Jiming of China International Capital Corp. in a June 30 report. “However, the stringent curbs on new debts may affect the future funding of infrastructure projects, thus exerting a negative impact on economic growth.”
Tommy Yang in The Times’ Beijing bureau contributed to this report.
