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Bankers Flocking to Shanghai
08/17/2009 4:55 pm EST
Foreign banks preparing Chinese share offerings should be able to raise capital on the cheap, writes Daniel M. Harrison on BNET.
The Chinese government is attempting to turn its energy-, export- and consumption-led stock market into something that looks more familiar to American investors: a heavily financial, services-weighted trading ring. That plan could create a strange tug of war in big-bank valuations.
[Recently], Shanghai broker Everbright Securities announced it was raising $1.6 billion for an initial public offering (IPO) on the city's local exchange, in what is to be the first public listing of a financial services firm there since December 2002. Days later, British bank HSBC (LSE: HSBA; NYSE: HBC; Hong Kong: 0005) said it hopes to be among the first foreign companies to obtain a listing in China. Hong Kong's Bank of East Asia said that it, too, is planning a listing in Shanghai sometime next year.
To Shanghai's Vice Mayor Tu Guangshao, turning Shanghai into one of the world's pre-eminent world financial centers has always been a dream. [When] I met him in 2005, he heartily endorsed Hong Kong-style capitalism and, indeed, envisioned it as the model for his own city. Giving banks—especially foreign ones—Chinese "A-share" listings is a major step towards achieving that goal. But in the aftermath of the subprime meltdown, international banks' listings in Shanghai may create some confusion among domestic shareholders as to the actual value of the bank and its assets.
In Hong Kong and China, it's commonly accepted by investors that companies which list in both places trade at a slight to hefty premium in the latter. It's called the "A-share premium," [a byproduct of China's restrictions on overseas investments by its citizens—Editor.]
While banks have performed pretty well in 2009, that's only because of the enormous capital hemorrhaging the year before. In other words, you could hardly say there's any kind of investor euphoria over financial institutions at the moment. But that's exactly what there's likely to be in Shanghai when financial institutions list there, since IPOs nearly always generate massive excitement—particularly foreign ones. That would be all very well, if it wasn't for the fact that most banks are sitting on a relatively large amount of toxic assets whose valuations look uncertain at best.
Take, for example, HSBC. The [New York-traded] ADR has risen a respectable, though unremarkable, 11.5% this year. When the British bank lists in Shanghai next year, however, there is likely to be a substantial premium to the [prices] HSBC commands in London and New York, as giddy Chinese investors snap up the shares. That [raises] a question: Since Chinese investors are willing to pay a higher price than American and British ones, does that mean that we have been undervaluing them?
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