AgBank chairman Xiang Junbo speaking at the bank stock's HK listing debut. On his right is HK Chief Executive Donald Tsang. -- PHOTO: REUTERS

BEIJING: The powers-that-be in China can be forgiven for being affronted at the dismal market debut of Agricultural Bank of China (AgBank).

Months of feverishly stage-managing the initial public offering (IPO) to ensure major investors soak up shares amounted to just a 2.2 per cent rise at the close of its first day of trading yesterday in Hong Kong.

At least this was an improvement on the 0.8 per cent gain the Shanghai-listed shares coughed up on the first day of trading on Thursday. It dropped 0.4 per cent to 2.69 yuan yesterday.

'The government must feel insulted - this is all they get for their huge jockeying effort behind the scenes to make (it) a market success?' said Hong Kong remisier Charlotte Leung.

Even the usually tame mainland Chinese papers highlighted the slight: 'The related authorities desperately held up the barbells (to prop up AgBank's share price), but the market just wouldn't give them face. Investors cashed out and ran,' said Jiangsu province's Yangzi Evening News yesterday.

Beijing's untimely move to list the weakest of its Big Four state-owned banks puts the spotlight on its curious love-hate relationship with markets and market reform. On the one hand, it recognises it needs the market to inject capital - and financial discipline - to turn AgBank into a truly viable bank. But on the other hand, it does not trust the markets enough to withhold its heavy hand of intervention in AgBank and to steer things in the direction it wants.

Still, it is somewhat of a leap of faith to list a structurally flawed behemoth like AgBank - at a time when market sentiment is subdued and analysts are asking tough questions about its asset quality following the past year's credit boom in China.

The bank's IPO is 'not so much a test of the markets' faith in China as it is an expression of China's faith in markets', noted Mr Robert Horrocks of Matthews International Capital Management.

AgBank's listing marks the final leg of a decade-long campaign launched by former premier Zhu Rongji to overhaul the banking sector by spending an estimated US$650 billion (S$895 billion) to mop up bad loans accumulated over years of indiscriminate lending to wastrel state-owned enterprises.

AgBank was the last state-owned bank to undergo restructuring in 2008, given its political function in supporting the vital agricultural sector and China's 800 million rural population,said Professor Li Jiming of Zhejiang University City College. This has made its reform process more complex, as it is focused on less profitable lending activities, from rural 'collectives' to local government-sponsored projects in the poorest regions.

Nonetheless, Beijing gritted its teeth and pressed on with revamping AgBank, including injecting US$19 billion into the bank and transferring 800 billion yuan (S$162 billion) worth of non-performing loans (NPLs) off its books in 2008.

Beijing even proved its determination to bring AgBank to the market by reportedly overriding appeals from the Ministry of Finance and the Chinese sovereign wealth fund's unit Central Huijin to delay the IPO just weeks before its launch.

So AgBank's listing proves that 'China is ready to push ahead with reform and commercialisation of the banking sector, even as the financial systems of the West falter and faith in markets has been undermined', Mr Horrocks wrote in a note.

But for sceptics, the rushed timing smacks of desperation to raise money for AgBank - after regulators ordered state-owned lenders to replenish their capital after a stimulus lending spree, and before domestic risks expose AgBank to even greater risks of loan defaults.

'A possible property market slump, or growing local government debt woes, may pose risks' for AgBank, noted Professor Mei Jun of Financial and Securities Institute of Renmin University.

At 2.9 per cent, AgBank's NPL ratio is higher than that of the other banks. But analysts reckon that it may be even higher given the lack of transparency and efficiency across AgBank's 24,000 branches.

Still, these risks 'have all been taken into account in the pricing' of AgBank's stock, noted Prof Li. The authorities accepted that 'it has to be priced relatively cheap to attract investors'. Even so, Beijing does not appear to have much faith that the markets would 'give face' to AgBank. So it has gone to great pains to bring on board cornerstone investors including Qatar Investment Authority, Standard Chartered and Temasek Holdings.

Their hefty investments show foreign investors have confidence in AgBank, proclaimed the bank's management.

But as analysts pointed out, these foreign big guns expect to reap a different type of returns from buying AgBank shares: closer guanxi with the government which will hopefully lead to plum deals where the real money rolls in.

It is yet unclear whether AgBank will claim the title of the world's biggest IPO, but 'what is certain is the share price will not be allowed to fall too much', noted Beijing-based trader Chen Boliang.

State-owned enterprises from Aviation Industry to China State Shipbuilding, which have already invested in AgBank's mainland issue, are lined up to 'do more national service', he said.

The disappointing reaction to AgBank may signal that investors have little faith in Beijing's resolve to make the bank truly market-oriented after its listing.

'The partial privatisations of China's Big Four state-owned banks so far have not led to successful, thorough reform,' noted research consultancy Stratfor.

AgBank's lacklustre market debut has shown Beijing that 'it cannot control markets entirely', noted remisier Ms Leung.

'But whether it will learn this lesson is a different matter,' she added.

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Source - The Straits Times (http://www.straitstimes.com/Money/Story/STIStory_554568.html)