Bank of Communications: IPO interest signals hope for Chinese banks

24th June 2005

Bank of Communication's shares rallied following its successful Hong Kong IPO.

Shares in the Bank of Communications surged on its first day of trading. Although the Chinese government hopes IPOs such as this will help its leading banks in the run-up to opening the market to foreign investors, doubts remain as to whether the IPOs of the other three state banks will go down as well.

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The recent $1.9 billion IPO of Bank of Communications (BoCom) on the Hong Kong stock market has been greeted positively by investors. Not only did retail shareholders demand 205 times the number of BoCom shares on offer at the event, but there was also a lot of interest from institutions and, as a result of the demand, the bank's shares rose by around 15% on the first morning.

The interest in the IPO is surprising given the gloom that has overshadowed Chinese IPOs in recent months. Last week Shenhua Energy, China's largest coal producer, saw its shares close 2.7% below the offer price, indicating that demand was lackluster. In addition, Cosco, China's biggest shipping group, is seeing low demand for its shares before its HK$12.9 billion IPO is priced.

However, the saving grace for BoCom was HSBC's 19.9% stake in the company which served to allay investor's worries of corporate governance and malpractice issues within the industry. In March a former Bank of China employee was arrested in connection with the alleged theft of $6 million and, also in March, the chairman of China Construction Bank, Zhang Enzhao, resigned for personal reasons amid reports of an investigation into alleged corruption at the bank.

The IPO of BoCom is part of the Chinese government's intention to launch multi-billion dollar listings of the country's big four state banks. China Construction bank is planning a $5 billion listing in Hong Kong this year and Bank of China and Industrial and Commercial Bank of China are preparing for overseas listings in 2006 and 2007. The cash from the IPOs is needed in order to clean up the banks' balance sheets before China allows foreign competitors to enter its banking system in 2007. However, as HSBC played a key role is soothing investors' doubts about BoCom's prospects, the other state banks facing upcoming IPOs may not find their flotations such plain sailing.
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