The bailouts were timed to reassure foreign investors who are lining up to buy into China’s murky financial industry, even before it’s clear just what is for sale. Under its agreement to join the World Trade Organization, China is opening banks, brokerages and insurance companies to foreign investors for the first time. When China Life Insurance went public last month, it put $3 billion in shares on sale, and got offers for $80 billion. In New York or London one can go to a Web site to check upcoming IPOs, but in China one goes to the rumor mill, which foresees as many as 100 IPOs in 2004. Prominent on that guess list are two companies Beijing bailed out last week: the Bank of China and China Construction Bank. Steven Irvine, editor of specialist publication Finance Asia, says, “The consensus is this will be a very big year for China issuance, though how big no one knows.”
The financial industry remains one of the most rotten sectors of the Chinese economy. By official count, Chinese banks hold at least $422 billion in nonperforming loans, mostly to state enterprises with little prospect of repaying. The new $45 billion bailout will be shared equally by the Bank of China and China Construction Bank to help prepare their books for listing. The conventional wisdom in the markets is that the state will use cash from those sales to shore up other banks so they, too, can find foreign buyers for their shares.
The sketchy story of China Southern Securities illustrates perfectly the opaque nature of Chinese finance. The private securities firm had been in joint-venture talks with Goldman Sachs and HSBC before Jan. 3, when Chinese market journals announced out of the blue that government regulators and the Shenzhen municipal government would take over Southern Securities, following the discovery of what market officials called “illegal and irregular operations, and disorderly management.” After revelations that the firm would be kept open with a $966 million bailout, the story died for lack of any further information.
Yet for two years now the troubled firm has been grist for the gossip mill even in Hong Kong, just over the border from Southern Securities’ base in Shenzhen. The company is widely believed to have debts of $1.2 billion, and problems ranging from misappropriation of funds to insider trading to failed property deals. At one point company officials publicly denied any serious problem and threatened to sue anyone who spread malicious talk.
Now the authorities are apparently doing what they can to make the story go away. On Jan. 5, the first trading day after the announcement, Shanghai’s stock market rose sharply against analysts’ expectations of a fall, climbing 3 percent to a seven-month high. Many China-market watchers assumed the state must have intervened. “It’s clear someone made a call,” says a Hong Kong analyst. “It is common knowledge that is how it works in China. It doesn’t take so much to boost the stock market.”
Foreign investors know the risks. The majority of China’s 131 securities houses are unprofitable, and 98 had a combined loss of $500 million for the first three quarters of 2003. Accounting horror stories abound. In one recent instance, a Chinese company going public valued its shares at 24 cents and reacted furiously when its international auditors put their worth at little more than a penny.
Interestingly, the Chinese are far less bullish on China than foreigners are, says Qu. The Shenzhen and Shanghai markets are open only to locals, and are flat amid slow trading. Hong Kong H shares are open to foreigners, and the index of mainland companies is up 139 percent over the last 12 months. Stephen Brown, head of research at Kim Eng Securities in Hong Kong, says: “This bubble could run for a while, but we have seen all of them end in tears. There is no reason to believe this will be different.” So why risk it? Above all, says Brown, the willingness to defy risks in China may signal even greater doubts about the recovery in Europe, the United States and the rest of Asia.
