Chinese Bank IPO Largest in History

The initial public offering (IPO) of Agricultural Bank of China shares on the Hong Kong and Shanghai stock exchanges raised $19.2 billion, with the possibility of the offering growing to $22 billion, which would be the largest initial public offering in history, reports the NY Times.

The Agricultural Bank of China, founded by Mao Zedong for the rural population, embraced the capitalist dream on Tuesday and did what would have been unthinkable in Mao Zedong’s time – it went public. This bank is just one in a series of initial public offerings by Chinese companies since China opened its stock exchanges 20 years ago. The IPO of Agricultural Bank cemented China’s position as this year’s leader in initial public offerings and once again demonstrated its economic and financial power. Indeed, more than a third of the companies listed on the stock exchanges this year were Chinese. The Agricultural Bank of China is valued at approximately $128 billion, more than Citigroup or Goldman Sachs.

Although the Agricultural Bank provides the most loans in China, doubts exist about the profitability of purchasing its shares. The NY Times reports that it has always been a weak link in China’s financial structure. Established in 1979, it has 320 million private and 2.7 million business customers, more than 24,000 branches, and approximately one trillion dollars in deposits. Despite these impressive figures, it has struggled with profitability. In 1998, the Chinese government provided 270 billion yuan, then approximately $33 billion, to recapitalize four major banks in the country. At that time, it purchased 346 billion yuan ($50.9 billion) of worthless loans from the Agricultural Bank, but the bailout failed.

In 2006, auditors discovered suspicious transactions amounting to 60.3 billion yuan ($7.5 billion). Two years later, non-performing loans accounted for about a quarter of the Bank’s assets. The government had to ‘pump’ in $19 billion initially, and then buy back another $120 billion of bad loans. Investors are aware of these issues, but almost everyone believes that the Chinese government will ensure its success, which is why they consider it a relatively safe investment. Larger corporations controlled by the government were among the first to invest in this IPO, which proves their claim.  (Z. S.)