Beijing delivers a profit to big investors in first day of trading for Agricultural Bank of China offering

07/15/2010 12:38 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

Shares of Agricultural Bank of China climbed on the Shanghai stock exchange in the first day of trading after the company’s IPO (initial public offering.) The gain was only 0.8% for the day, but that’s impressive enough since the Shanghai Composite Index was down 1.9% for the day and the shares of China’s other big banks dropped.

Why should you care? After all you didn’t buy the IPO.

IPOs on the Shanghai almost always climb in price in the month after they start trading. It’s part of the deal: Investors, particularly large institutional investors, put up capital to fund state-controlled companies (a category that includes all of China’s biggest banks) and the government guarantees them a profit.

With China’s banks looking to raise $44 billion in new capital in 2010 (not counting the $20 billion raised in the Agricultural Bank of China IPO) it’s absolutely critical to the health of China’s banking system that this quid pro quo remain intact.

If the government can’t deliver profits to the big overseas investors who put money into the Agricultural Bank of China deal, China’s banks are going to have a tough time raising the capital they need.

So far the price gain—from an initial 2.68 yuan a share to 2.70 yuan--is, like so much about this deal, just on the right side of acceptable. The gain of 0.8% today is the smallest first-day gain among the nine banks that have sold shares in Shanghai over the last four years, Bloomberg calculates.

The government struggled to get the offering priced at a level that put it within reach of the record for the largest IPO ever a record set by Chinese Bank. It lined up an impressive list of institutional investors for the deal but the offering never achieved the pre-trading level of momentum that makes a deal hot.

And an 0.8% gain on the first day of trading is just on the right side of zero.

Now the government just has to deliver for the long term. You know, like a month.

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