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Andrew Collier

China Construction Bank is expected to be the first of the Big Four lenders to go public with a mandate later this year

China Construction Bank (CCB) is expected to be the first among China's Big Four state banks to go public, following a mandate that could be issued as early as the fourth quarter of this year, according to bankers and economists.

The listing would signal China's increasing commitment to financial sector reform.  Most industry watchers say the upcoming changes in the banking system will surpass those that transformed China's telecommunications industry in the 1990s.

'This is a hot area and the next big industry to be exposed to the international capital markets,' said Li Hsiao-chiung,  a partner at law firm Shearman & Sterling, which was involved with the public offering of the Bank of China's Hong Kong operations last year.

'China has gone through various industries trying to make them more international and this is the next challenge.'

A listing could take more than a year to complete after a mandate is issued. Apart from scrutinising the books, the government has to resolve the banks' huge levels of bad debt,  analysts said.

In November last year,  heads at three of the Big Four - Bank of China (BOC), CCB and Industrial and Commercial Bank of China - said they planned to list by 2005.

CCB, whose lending activity is focused on infrastructure projects, is widely regarded  as the leading candidate for the first public listing because it has one of the strongest balance sheets of the group.

Morgan Stanley is the lead candidate to handle the listing. Morgan Stanley and CCB have a joint venture investment bank on the mainland, China International Capital Corp.

'Morgan has a very good chance,' the head of equity capital markets for a competitor said.

'CCB may have to lower its NPL (non-performing loan) ratio but it has the largest exposure to infrastructure projects.' This is positive because of the hard assets backing loans. However, he noted that CCB needed to prune more staff than some of the other Big Four.

Other analysts see CCB and BOC as equally likely candidates for the first listing. 'BOC and CCB offer investors the most appealing entry points into [China's] major banks,' according to a report by John Yakas,  an analyst at investment bank Fox-Pitt, Kelton.

The four banks must overcome significant problems before investors will feel comfortable buying shares. 'There are still significant asset quality and capital adequacy issues to be resolved prior to flotation,' Mr Yakas said.

First and foremost are their  NPLs. Official numbers put the total at 1.77 trillion yuan (HK$1.65 trillion), or 25 per cent of loans outstanding.

However, some experts say Chinese accounting vastly understates the real figure, which could be as high as 50 per cent. Nicholas Lardy,  of the Brookings Institute in Washington, said in a recent book that 'China's four major banks as a group have a negative net worth and thus are insolvent'.

There is also a question of how the banks will be listed, and whether the markets will accept each bank as a whole or require a 'carve-out' of their stronger parts.

A financial sector specialist at one investment bank said: 'There are a lot of rumours spreading around. There are questions whether China goes for a 'big bang' approach, that is, with one big institution, or whether it would be slimmed down by either business line or geography to make it easier [for a listing].'

He said CCB had explored a 'carve-out' by business line. A spokesman for CCB declined to comment on its listing plans.

A carve-out, however, brings its own problems. The public listing of the Big Four's stronger sectors would signal to Chinese customers that there are both good and bad banks, potentially triggering flight  and severely damaging the banking system.

Questions also arise about  where the listings would occur: China, Hong Kong, New York, London or at all four.  Western markets have more potential investors but higher accounting standards.

In China, 'you have a better valuation and a less demanding investor community', said Tracy Yu, an analyst at UBS Warburg. 'If you use overseas markets, you'll be kept under heavy scrutiny by institutional investors. It depends on whether you want to raise a lot of money.'

Tomorrow: Focus on privatisation of smaller banks



CCB listing flags upheaval in industry reform