One step back and one step forward on the IPO (initial public offering) for the Agricultural Bank of China.
I’ve repeatedly tabbed this IPO as the indicator I’m watching to figure out the health of China’s stock market in particular and its financial system in general—and to time buys of Chinese stocks.
China’s already publicly traded banks need to raise $40 billion in new capital this year to meet requirements from bank regulators for higher reserve levels and to meet demands from the economy for new loans. The ability of the Agricultural Bank of China, the weakest of China’s big banks and the last to go public, to sell what was initially pegged at $30 billion in new stock would be a huge vote of confidence in China’s ability to meet both those goals. (For more on this indicator see my post https://jubakpicks.com/2010/06/07/when-to-buy-chinas-stocks-my-leading-indicator-still-looks-positive-for-july-but-the-reading-is-foggier/ )
However, towever, Hhe IPO market in Hong Kong isn’t looking especially favorable to this IPO right now. Five companies have pulled about $3.8 billion in potential initial public offerings from the pipeline in the last few weeks because of a faltering market. (For more on the role of real estate in that market weakness se my post https://jubakpicks.com/2010/06/16/332-million-real-estate-sale-collapses-in-hong-kong-more-to-come/ )
The latest deal to get pulled is the $1.2 billion IPO of China’s second-biggest wind turbine manufacturer Xinjiang Goldwind Science & Technology.
But there’s good news on the Agricultural Bank of China offering too.
The Beijing government clearly wants this IPO to go to market and is pulling out all the stops to line up big investors for the shares. Latest to sign on are Cheung Kong Holdings chairman Li Ka-shing, the third richest individual in Asia, and Henderson Land chairman Lee Shau Kee, the fourth richest individual in Asia.
The bank has begun pre-marketing its IPO, a process that involves providing more financial information and forecasts to analysts and investors who are trying to put a value on the company. Right now it looks like the offering will bring in something less than the initial $30 billion estimate and something more than the recent $20 billion projection.
The Hong Kong H-share offering is scheduled to begin trading on July 16.
CallOfDutyFan:
I just started reading a book on China, but had heard the author interviewed and he discussed how workers would create “mental blueprints” of the machines that they worked and then move to a rival company or start their own and build the same machine. This would keep going where you had copies of copies of copies which created some issues. I also remember a story of a GM (I believe) car to be sold in China and the plans were stolen and a rival had the same car out before GM.
I also seem to recall Jim mentioning a similar theme in a China column on why the Chinese wanted to get more sophisticated manufacturers in China, such as wind turbine, auto, etc.
To give the Chinese a break, a also remember hearing/seeing that the US did the same thing to the British. Lure them in with cheap labor and then “borrow” their technology.
CallOF duty
There was recently an interesting report in 60 minutes on Cyber thief /spying/terrorism. You can listen to it as a podcast. Apparently the Chinese are very active and have stolen tons (or rather terabytes) of information from the US
Run26.2 – Just curious. Can you quote examples of theft of technology by the Chinese? The only thing that I can think of is the Operation Aurora attacks on Google.
I think the key word was “ever so slightly.” I can’t help but think that the China shares will go down just the US shares do. The Global markets all seem to be tied. The only way I know to invest in China is the ETF, PGJ. It seems to be mirroring the US markets. Besides, if I bought today, i would feel like I was buying at the high end. I bet you can get in next week at a better price.
The wage advantage of China or any other far east country is also dependent on cheap transportation, e.g. oil. If oil spikes again (and it will as we deplete the easy reserves) then manufacturing in the US for US sales becomes more probable. Plus, at some point, the foreign companies will get tired of having their technology stolen by the Chinese.
davcbr,
Point taken. 😉
I think the key takeaway from this discussion is this: Avoid low profit margin Chinese companies. They will be forced to compete with companies from lower wage countries, and will either have to move their operations out of China, or fold.
A Chinese company with a higher profit margin has a long term cushion to handle Chinese inflation (both wage and commodities). This is not unlike what happened in the U.S. at the end of the 20th century, where many low margin companies either went out of business or outsourced their operations to other countries.
Djpoints suggests “A weakening US or EU econ favors China. A strengthening US or EU econ favors China…”
An intriguing position, because:
(a) When opposite developments produce the same result, what you’re really arguing is that China has unhitched itself from the West.
(b) By nearly every measure, India has a significantly more insulated market than China. It also has generally lower wage conditions than China (more “slave-like conditions” – albeit, as a democracy, that’s an inaccurate term).
Which gets me here:”Long China as long as they play by their own rules…”
Fair enough – except please point out the Chinese rule that says capitalist investors in listed companies are entitled to profits…I wasn’t aware that the sacred capitalist precepts were so firmly embedded in China…
Ed
Not that you don’t have a point about Viet Nam et al, but I think it is relative. Why would anybody buy anything from the US when they can get it cheaper in China? The problem is that our wages are so much more than China’s. The other side of all that is that there are a lot of things that are worth more that we make, and the same [hopefully] will be true for China vs its neighbors. The only way to grow into first world status is to have added value. It seems to me that at some theoretical future point there will be only one winner and the rest of the world losers, OR all will be winners, each having a ‘specialty’ that others trade their ‘specialty’ for.
One of the inherent problems in China is that, as it grows, it becomes less economically prudent to do business there. The big problem there is the wage inflation, which is starting to make nearby countries like Vietnam, Malaysia, and India cheap by comparison. Why pay for China’s cheap labor when you can get even cheaper labor?
Mind you, I am talking long term trends. In the next 12 months, China is still the play.
All,
For those who havent seen it Michael Pettis blog has been referenced in the FT recently as is quite interesting/contrarian on the China story. Here is the link
http://mpettis.com/
Ed,
A weakening US or EU econ favors China. A strengthening US or EU econ favors China. As long as they continue to manipulate their currency (which they will) for whatever the conditions require, why would it make any difference? The billions of migrant ‘slaves’ will continue to flood the global market with ‘affordable’ goods meeting the demands of both a weakening or strengthening export econ.
Long China as long as they play by their own rules…which again they will, b/c they have the world by our…
arihalli,
Yes, look what the Chinese are developing in Greece. Soon to be the largest (im)port in Europe…bigger than Rotterdams. Whether they like it or not, Europe is about to be “Made in China”.
Ed, i have read that Europe may be the largest importer of Chinese products. I dont know if it is true. Myself, i don’t know why anyone would wish to purchase right now without knowing if a second and steeper wave down may be imminent.
I should have said Chinese stock prices.
Jim,
Just re-read the 06/07 post, and had these thoughts:
Does the pushback on pricing of this IPO possibly indicate that maybe there won’t be a bubble on stock prices, but rather an extended, and more sustainable, increase in stock prices instead? (so its kind of good news??)
2nd: Do you ever get discouraged that sometimes all of the comments in an article are are about everything else except the article topic?
Thanks for a great job and please keep up the good work.
Phil
Jim,
Does the Chinese market still look as good if the EU or the U.S. economies start to look weaker? Considering both of those will account for a considerable amount of any Chinese export growth going forward, wouldn’t problems there create headwinds for Chinese stocks?