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Legal Journals: The Journal of the Business Law Society
IPO of China Construction Bank
By Lei Wang
The Initial Public Offering (?IPO?) of Industrial and Commercial Bank of China (?ICBC?) set the record for the amount of money raised among all IPOs ever made over the world. The IPO of ICBC was actually one of the steps the Chinese government had taken to privatize (or at least partially privatize) its four major commercial banks: ICBC, China Construction Bank (?CCB?), Bank of China (?BoC?) and Agriculture Bank of China. CCB and BoC already performed IPOs during the last two years and the IPO of Agricultural Bank of China (?ABC?) is scheduled at 2008. ICBC, established in 1984 when China began its capitalist turn, boasted $724 billion in deposits, 355,000 employees and 18,038 branches, more than three times as many as Bank of America, the USA's largest bank.? In this article, we focus on the listing choices of CCB, as it was the first of the four big banks to have listed itself on public stock exchanges.
There are basically three choices for Chinese companies when they want to list themselves in public exchange: domestic (Shanghai or Shengzheng), Hong Kong and New York. European stock exchanges (like London or Frankfurt) are seldom considered because most European investment is not familiar with Chinese companies and thus reluctant to invest. The above three exchanges all have its own advantages and disadvantages. New York Stock Exchange is known for its capability to raise large amount of funds, but US has the most restrictive security regulations, which made it difficult for most Chinese companies. Chinese domestic stock exchanges have more relaxed requirements but the stock marker in Mainland China is very immature and the volatility is high. Therefore most large Chinese companies, when facing the need to raise overseas funds, usually would select Hong Kong as its best place to do IPO, as it has not only the advantage of a mature market, overseas fund raising capability but a less restrictive regulation as well. There was a rumor that CCB previously planned to list itself on NYSE but later decided to turn to Hong Kong due to legal problems. However, CCB once issued an official statement denying this and said it prepare to apply to be listed in Hong Kong Stock Exchange at the first place.
The IPO in Hong Kong was quite successful. CCB (whose share was listed as 0939.HK) initiated 26,485,944,000 H shares at the price of 2.35 Hong Kong Dollar (HKD), which constituted about 14% of all its capital. The total raised capital was about 8 billion US dollars, of which 0.6 billion are sold to retail investors. Strategic investors including BoA and Temasek bought about 1.5 billion in total and other international institutional investors had shared the rest 5.9 billion. One thing to note is that the subscriptions before IPO exceeds 80 billion, which made CCB?s initial shares ten times over-subscribed for institutional investors. For retail portion ?market sources have said the IPO's retail portion was more than 42 times over-subscribed, less than the 50 to 60 times level earlier estimated by Hong Kong brokerages.? 
The IPO process at that time was one of the world?s largest in terms of the capital it had raised. The results turned out be quite good considering that fact that the Chinese banking law has required that shares of all foreign investors in a Chinese bank be lower than 25% in total and shares of any single foreign investor be kept below 20%. This is why only 14% of the total CCB shares were sold for IPO. If CCB had offered more initial shares, it would have been very certain that they could raise much more capital than they did. At this point it is not clear whether this regulation could be an obstacle in the future for Chinese banking industry?s privatization process. However, CCB?s IPO performed at Oct 2005 was quite successful considering the demand for IPO shares and its final results. Most analysts keep a modest optimistic tone on CCB shares. The later BoC and ICBC IPO both turned out to be successful and were welcomed by the market.
Bringing Bank of America and Temasek into the partnership with CCB was one important step towards privatization. As Chinese government?s goal in this privatization process is to eliminate the government?s influence from the bank and let it operate by itself. Experienced commercial banks like Bank of America was certainly a good choice and BoA actually get two positions in CCB?s board. CCB even built a western style café in the Beijing headquarter building as Bank of America actually sent about 50 people to work in Beijing. It is clear that CCB do need the experience and expertise from Bank of America. In Oct 2006, CCB spend 9.71 billion dollars to fully (100%) acquire Bank of American Asia, which is another important step to make CCB and BoA closer in their cooperation. The deal gives CCB ?much-needed cash and a measure of respectability as it prepares for major changes in China's competitive environment?.
At the other side, the deal ?gives BoA a toehold to access the numerous branches, the large deposit market and the emerging but rapidly growing credit card business.?. Clearly partnering with CCB is a good chance for BoA to enter into the Chinese market. By agreeing to increase their shares of CCB to 19.9% in the future, BoA actually tries its best to maximize its existence in China. The market in China?s banking sector is certainly very alluring. There are huge amount of residential deposits, growing demand for credit card business and a thirst for small amount loans in rural areas. All these factors would bring to Bank of America large profits in the foreseeable future if it can operate in the Chinese market. As the deadline of Chinese admission of foreign market is approaching, it is really a good opportunity to start cooperating with one of the four big players now.
CCB also had talks with Citibank before the IPO and somehow no agreements had been made. There were rumors saying that Citibank didn?t wanted to make a commitment to further purchase shares during CCB?s IPO and this was the major reason that drove CCB to Temasek.
Cooperation with Temasek was a totally different story. Temasek Holdings is an investment company fully owned by Singapore government (Ministry of Finance) and is Singapore?s largest company with more than 90 billion dollars assets. They hold approximate 47% percent of all shares being traded in Singapore?s stock market. Besides investment in Chinese banks, Temesak is also very interested in Asian markets and have been holding shares in Malaysia, India, Australia, Taiwan etc., mostly in large state-operated enterprises like banking, telecom industries. As the CEO of Temasek Ho Ching puts it at November 15, 2006, ?Temasek?s decision to start investing directly in Asia four to five years ago was taken after seeing the emergence of similar market reforms and changes in the region that had made its investments in Singapore so successful, the head of the Singapore investment company said yesterday.?  On areas of their particular interest, Ho commented, ?We look for sectors like infrastructure, transport & logistics, banking, services and financials because these are broad-based reflections of the economic opportunities. A second theme is to focus on services, products or companies that serve the middle class. This includes consumer banking and telecommunications.?
It is difficult to see why CCB particularly favored Temasek as its partner. One of the most likely reasons might be that Temasek is a state-owned company with very efficient management, which the Chinese government is eager to achieve. Although Temasek is 100% owned by the Singapore government, it has been one of the most successful investment companies in Asia and most of its operations are based on real market situations without any interference from the government. This mechanism is certainly what the Chinese government would like to learn from.
The privatization of banking industry in China is really a new and immature process compared with those in other countries. The prospect is still kind of unclear and risky. The real limitation comes from the fact that the privatization is carried out under a political system, which is far from a capitalism country. Whether the effort of privatization of China will be successful can?t be seen in the next 10 or 20 years. As some of the analysts have put it, ?while we agree that much progress has been made, we are skeptical that the existing reforms are likely to be sufficient to ensure that the result will be effective intermediation of Chinese savings.?
 CCB Bank IPO Raises US$8 Billion, China Daily, Oct. 21, 2005, available at http://www.china.org.cn/english/2005/Oct/146201.htm
 Knowledge at Wharton Team , What's Behind BoA's Bold Move into China? available at http://knowledge.wharton.upenn.edu/article.cfm?articleid=1234
 Temasek CEO speaks about investing in Asia, Financial Asia, Nov. 23, 2006, available at http://www.financeasia.com/article.aspx?CIaNID=42179&r=hstory
 Wendy Dobson, The Contradiction in China?s gradualist banking reforms, available at http://faculty.chicagogsb.edu/anil.kashyap/research/chinabanksoctfullpaper.pdf
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