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IPO

Demystify the sale of CCB shares

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Coule day a ago I came across this BoA (NYSE:BAC) bought CCB (China Construction Bank, Hongkong 0939) shares at dirt cheap price story from my Chinese friend StrengthTrader (English news here). After that I read this one original written by 21cbh, titled The Mystery of 70% Off of CCB Shares, here is a faster link from baidu finance. BTW, I always bought and liked 21cbh when I was in Shanghai last year.

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(People waited outside CCB branch, Shanghai Apr 2007)

Chinese financial blogger Ye Tan wrote a piece titled Who bears the cost of cheap sale of CCB? I agree with some of her comments. But I also would like to add my own 2 cents: I am not going to talk politics (as the US presidential election already made my head spin); I am only talking about the financial aspect of the things here.

1) This BoA deal is done before the IPO of CCB. Like many things in China, the IPO of CCB, the first IPO of the big 4 Chinese banks (other 3 are ICBC, BoC and Agriculture bank), is not a purely financial decision for the owner (goverment): it was also a political one. This got to be a success. A success of IPO has different means for different people. In this case the goverment decided leaving some money on the table (stock price going up after IPO) is important. This also explained goverment infused massive cash before IPO (quoted below, source ccb.com):

2004 marked a historic milestone for the Bank. At the end of 2003, a capital injection of US$ 22.5 billion was received from China SAFE Investments Limited, previously known as Central Huijin Investment Co., Ltd. (“Huijin”), as part of the decision of the State Council of the People’s Republic of China (“the State Council”) to enhance the financial condition and competitiveness of the state-owned commercial banks….

2) Put it in another context, this deal happened after China joined WTO, and agreed to open the banking industry to foreign competitors. Chinese banks felt compelled to learn things from foreign partners to enhance its competitive positions. Because the Chinese banks thought their management efficiency is no where near the international players, and worried they will be defeated. Lack of confidence. This lack of confidence also led to its under-estimation of its growth (way too low).

3) A very small circle of bidders (foreign banks) were invited. CCB only wanted the elites. But as we saw from the unwinding of subprime and credit crisis, many international banks are over-rated: note the CitiBank, AIG, Deutch Bank,…all took big loss in lately?

4) Unmotivated seller (economically): at the end of the day, the Chinese banks are owned by the goverment. The people in charge are just acting as agents. It’s not their own assets after all.

Lesson learned:
It appears the goverment did slightly better after the 70% Off sale of CCB shares. This can be seen on the ICBC IPO: they sell a much smaller stake to Goldman (compared to BoA) etc.

How it related to me
I am not the sour loser here, although as a Chinese citizen, I think I am entitled to a small slice of the Chinese state owned banks.

Recently I bought 2 shares of BRK.B, and through that I owned both CCB and ICBC indirectly, because Berkshire has significant shares of BoA and American Express. As you guessed it, American Express got a small piece before ICBC IPO, at dirt cheap price too (about 1.20 Yuan, $0.15, refer to this ICBC share structure).

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