Chinese Bank Plans Huge Public Offering

In what could be the biggest initial public offering (IPO) in history, the Agricultural Bank of China is preparing to test investor faith in China's economy. The bank has 24,000 branches and the largest customer base in the world.

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What would Chairman Mao say? The bank that he set up in 1951 to lend to China's rural cooperatives is now poised to sell around $20 billion in shares. It could be the largest stock market listing in history.

As NPR's Anthony Kuhn reports from Beijing, the listing comes amid Chinese stock market doldrums and investor concerns about possible bad loans.

ANTHONY KUHN: The government has done a lot to spruce up the Agricultural Bank of China for its big listing on the Shanghai and Hong Kong exchanges. It's lined up big institutional investors to buy shares, and it's cleaned up the bank's balance sheets by absorbing billions of dollars in bad loans, which only a few years ago made up nearly a quarter of the bank's portfolio.

But that's not the whole picture, says Nicholas Lardy, an economist with the Peterson Institute of Economics in Washington.

Dr. NICHOLAS LARDY (Senior fellow, Peterson Institute for International Economics): The real question is how well the Agriculture Bank will do going forward. Does it have a viable strategy for lending that will make it a profitable operation?

KUHN: China responded to the recession last year by unleashing a flood of lending through state-owned banks. Now, these banks have to replenish their capital through stock listings.

The concern, Lardy says, is that a lot of the loans went to unprofitable local infrastructure projects.

Dr. LARDY: There is concern that the debts could go bad. My own view is that the real economic returns on most of these projects are likely to be quite high.

KUHN: Lardy points out that China is rapidly urbanizing and it needs the waterworks, subways and electricity grids that local governments are building. But the Agricultural Bank listing comes at a generally gloomy time for Chinese investors. The Shanghai Exchange is down 22 percent this year, and Hong Kong's Hang Seng Index is down nearly 10 percent.

Independent Shanghai-based economist Andy Xie is worried that a bubble in China's property market could hit the banks hard.

Dr. ANDY XIE (Shanghai-based Economist): (Through translator) Local governments' main asset is now land. And they use that land as collateral for the loans. So the feature quality of the bank's loans depends to a great extent on land prices.

KUHN: The question facing investors today is much the same as always: Do Chinese banks make loans that are commercially sound or do they just lend in support of government policies?

Policy lending contributed to a crisis of bad bank debt a decade ago. Lardy says that Beijing learned a few things in cleaning up that crisis. China's banks have fewer risky loans on the books than a decade ago, he says, and they're better capitalized to cover those risks.

Dr. LARDY: Bank capital adequacy for all the big banks is well over 10 percent, which means they have a very large cushion to write-off non-performing loans. Ten years ago, they had absolutely no cushion whatsoever. Their real capital was negative. They had no capacity to absorb non-performing loans.

KUHN: If there's one thing the Agricultural Bank doesn't have to worry about, it's having enough customers. It has 350 million of them and 30,000 ATMs.

Anthony Kuhn, NPR News, Beijing.

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