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In my June 3 post “Think China’s bear market is a buying opportunity? Here’s one way to tell when to get in” I said watch the proposed $30 billion Agricultural Bank of China IPO (initial public offering) set for July.

If the offer goes on schedule, I opined, it was a sign that China’s banks would be able to raise the capital they needed–$ 24 billion to $4 billion above the $30 billion in the Agricultural Bank IPO—in 2010. That would be a huge load off investors’ minds and could be an all clear to put money in Chinese equities. If the offering didn’t go, it was a signal that the China’s financial markets were weaker than optimists hoped and we might be in for another leg down in stock prices.

Well, it doesn’t look like reading this indicator is going to be quite that binary.

Analysts and bankers close to the deal, the Financial Times reports this morning, June7, say that the deal will go on schedule but for less money than anticipated. The IPO is likely to raise $20 billion rather than $30 billion. That would make this the second largest IPO ever—not the world’s largest ever—to the $22 billion IPO of Industrial and Commercial Bank of China in 2006.

The problem seems to be that while there is enough demand to soak up the 56.3 billion new shares (17% of the bank) to be offered in the IPO, buyers are balking at the price asked for shares in the IPO. Agricultural Bank of China is the last of China’s big state-controlled banks to go public and it is widely regarded as the weakest bank in the group. Initially the deal was priced at a 1.94 price to book value ratio. That has struck IPO buyers as extremely rich and they’ve argued for a 1.2 price to book ratio. Sources have told the Financial Times that the final price is likely to be 1.3 to 1.5 times book value.

So how do you interpret that?

I’d say that the bank’s ability to raise even $20 billion in a financial market like this is good sign for Chinese stocks going forward. If the IPO went at that price, it would indicate to me that China’s banks are going to be able to raise the capital they need to keep on lending—essential for China’s economic growth—and to meet tougher capital requirements from the government. (For more on why China’s banks need to do both, se my post “Move over Charles Ponzi and Bernie Madoff—China is running history’s largest financial scam”

But the lower price for the IPO would make me more cautious about what I’d pay for shares in a Chinese company.