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Trick of Chinese privatisations
Francesco Guerrera
10/22/2005
Nemo propheta in patria. The Gospel's warning that nobody is considered a prophet in their homeland has been well understood by Chinese companies. Instead of wasting time on the ailing domestic markets, they tap into the deep pockets of foreign investors.
The recent $7.0bn Hong Kong listing of China Construction Bank -- most to be the world's largest initial public offering (IPO) this year -- will be no exception.
Foreign fund managers have been rushing to buy into the IPO, while Hong Kong retail punters are expected to apply for more than 100 times the amount of shares on offer.
It is difficult to blame Chinese companies for their lack of national pride when it comes to raising funds.
The home market looks like a casino where even the house loses -- populated by bust brokerages and plagued by the absence of institutional investors.
By contrast, the seemingly insatiable hunger of overseas capital markets for China exposure has enabled Beijing to pull off a spectacular trick over the past decade or so.
Listing its largest state companies on the Hong Kong and New York stock exchanges, has enabled China to fund a significant portion of its rapid industrialisation through foreign capital. Over the years, key industries such as oil, telecommunications, electricity generation and, now, banking have all been sold off to willing fund managers.
The beauty of the operation, if you are a Chinese ruler, is that no company has actually been privatised, as foreign shareholders have only been allowed to buy minority stakes.
With the government still calling the shots, the "privatised" companies have embarked on all sorts of financial adventures.
Foreign shareholders can only watch and hope for the best as their companies pay fat dividends to their state-owned parents, buy assets from related entities at cut prices and launch risky expansion plans.
There is another side to this Faustian pact between Beijing and overseas investors: Chinese state companies are invariably sold at a discount to the market and international peers. For a government that officially recognised private property only a couple of years ago and has made a mess of its own stock markets, the Chinese rulers display an in-depth understanding of foreign capital markets.
Cheap TPOs allow fund managers to look good in the quarterly league tables, investment banks to boast about successful deals and companies to get the funds they need. They may all be exchanging money for old rope but at least it is inexpensive old rope.
Frankly, who can argue with a stock like Petrochina that has delivered a return 34 times higher than the overall Hong Kong market since its 2000 IPO?
CCB looks a similarly alluring proposition. It is priced relatively cheaply, it has unleashed foreign demand and Beijing is its largest shareholder. But there are two crucial differences between China's second largest bank and the state-owned enterprises that preceded it.
For a start, most of the companies listed overseas in other sectors had monopolies or dominant positions in particular geographical or industrial areas. China Telecom, for example, theoretically competes with China Netcom, but in reality it dominates the south of the country, leaving the north to its "rival".
By contrast, Chinese banks, especially the Big Four national lenders, compete across the country on most products and, from 2007, will have to contend with aggressive foreign entrants. More important, the other industries that have been privatised were cleaned up and restructured before the IPOs. In the case of CCB, and the other banks to be listed, the IPO is the restructuring.
The money raised will be used to clean up the balance sheet and pay for much-needed upgrades to systems and operations.
Crucially, that will leave shareholders to shoulder the risk that management might mess up such a complicated overhaul.
Before filling those IPO order forms, fund managers and retail investors ought to remember that, although nemo propheta in patria, Chinese companies' profits tend to stay in patria.
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Under syndication arrangement with FE
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