Why are Chinese banks hot?

The huge interest shown by overseas investors in the initial public offering of the Industrial and Commercial Bank of China (ICBC) highlights the scramble to gain a foothold into the Chinese banking system. ICBC is the largest bank of China and its IPO is all set to become the world's biggest IPO. ICBC plans to debut in Hong Kong and Shanghai on Oct. 27 - the first IPO to be simultaneously listed on both stock exchanges.

The degree of interest in ICBC stock can be gauged from the fact that the entire order book meant for institutional investors had been filled within an hour of the formal solicitation of bids. By the end of the first day investors had placed bids for three times the number of shares on offer and it was nine times subscribed by the close of the next day.

If priced near the top of the range (which is almost certain), the issue will garner US$22 billion, beating the record of $18.4 billion set in 1998 by a Japanese mobile-telecoms operator. The sale will also place ICBC among the ten most highly valued banks in the world, with a market capitalisation close to $130 billion.

ICBC is the latest in a series of massive IPOs launched by Chinese banks during the past year. Bank of China, the country’s second largest lender, raised US$11.2 billion with an IPO that was the fourth-largest on record. China Construction Bank, the mainland's no. 3 bank, raised US$8 billion in October 2005. It’s the strong growth recorded by these banks in the sizzling Chinese economy that is luring the institutional investors. There is a scramble among the financial powerhouses of the world like Goldman Sachs, Morgan Stanley and Citigroup to gain a foothold into the Chinese banking system.

For the investors, these banks are a sort of a proxy for China itself: vast, diverse, growing fast, and with extraordinary scope for internal restructuring. Economist terms the ICBC IPO as a single transaction that could sum up the knowns and unknowns surrounding China's red-hot economy. According to an Economist article, “…ICBC, however valuable, also reflects the murkier side of life in the Chinese economy. Political considerations often come first, information is unreliable, and openness in the banking system is questionable, despite conditions tied to China's entry into the World Trade Organisation.”