SHANGHAI, Aug. 9 (UPI) -- It was supposed to have been the crowning achievement in the long history of China's top bank, intent on shaking off its stereotype as a state-owned cash register, rife with corruption and mismanagement: a listing on the overseas stock exchange.
But the initial public offering of Bank of China Hong Kong (Holdings), which went public on July 25 after more than a year of speculation, got a weak reception. It fell 4.7 percent on the first day of trading, down about 5 cents (40 Hong Kong cents) from its opening price of $1.089.
Brokers said heavy buying by the underwriters -- Bank of China International Holdings, UBS Warburg and Goldman, Sachs -- kept the shares from falling further. The price has been largely static since.
The listing, which was both the first by the state-owned bank's Hong Kong unit and by a mainland Chinese bank, raised $2.5 billion.
One-third of the shares were set aside for retail investors in Hong Kong at a 5-percent discount. The rest were sold to large foreign and domestic institutions.
"Given the situation with markets around the world, it's amazing that they even went forward with the listing at all," said Marcus Wilson, a Beijing-based private stock market analyst.
"It's going to be interesting to see the response of the Chinese government to additional IPOs."
Analysts say recent declines in global equity markets and investor nervousness about the state-owned bank's high level of non-performing loans have kept serious long-term investors away.
"This is a long-term investment, but there are few investors willing to take a chance on it," said Chen Bo, an analyst for Shanghai Securities. "There's too much confusion on the markets."
Most analysts don't expect the share price to rise much in the next couple of months.
"After the dismal reception given to the Bank of China HK's listing, other mainland Chinese banks might think twice about overseas share listings," said He Fei, who is with Haitong Securities in Shanghai.
Regardless, most analysts say the listing will be a benchmark for China's financial institutions, which are seeking to improve their international image.
China is liberalizing its four big state-owned banks, and it is opening the banking system to more foreign investment under World Trade Organization rules. It hopes that overseas listings by its financial institutions will improve business practices and their competitiveness as foreign competition increases.
The four big state-owned commercial banks -- BoC, the Agricultural Bank of China, the Industrial and Commercial Bank of China, and the China Construction Bank -- are still mired in bad debt problems that go back a decade. By Western standards, they are technically insolvent.
Chinese banks have low capital-adequacy ratios and must turn to the capital markets to fund their restructuring.
Banking industry executives and analysts predict that the BoC listing could be followed by a wave of domestic listings by smaller Chinese banks over the next three or four years.
Speaking at a global banking conference in Shanghai in June, Paul Kennedy, managing partner of KPMG Consulting's division in Shanghai, said his firm was advising several Chinese banks about possible large overseas listings in Hong Kong and New York.
"Over the next three or four years, you could see 10 of those banks list. These are second-tier banks, which are in much better shape with less of a history of bad debts," he said.
These banks are "much more nimble and have better management information systems," Kennedy said.
He said these smaller banks could easily survive the onslaught of foreign competition that is expected when the local retail banking market opens in 2007 under a series of WTO deals. Banks in China have been trying to improve their performance ahead of the market opening.
But some analysts say the lackluster reception given to BOC's Hong Kong listing shows how suspicious foreign investors remain about China's debt-ridden financial institutions.
"Foreigners just aren't convinced that China's banks are on the road to recovery," Wilson said.
BoC Hong Kong, which has about $98 billion in assets, has a high bad loan ratio, amounting to more than 10 percent of its total loans at the close of 2001.
Its parent, Bank of China -- the nation's top foreign exchange lender -- has a non-performing loan ratio of nearly 30 percent, according to banking industry analysts.
Other problems for China's state banks are crime and corporate governance. BOC, which has been plagued by a series of fraud and mismanagement scandals over the past year, has had a hard time convincing the global banking community that it has adequate risk controls.
Two years ago, a government probe found that BOC officials had illegally lent millions of dollars to securities firms, which in turn invested the money in the stock market. Hordes of banking officials and brokers were implicated for reaping millions in profit speculating on the nation's bourses.
Investigations of BOC's dealings over the past decade have unearthed a long money trail of fraudulent transactions spanning the globe. These scandals have brought down senior financial officials.
In January, Wang Xuebing, president and chief executive officer of China Construction Bank, was sacked after investigators found evidence of fraudulent financial dealings during his tenure as the governor of BOC in New York, a post he held for several years during the 1990s.
Shortly after, BOC's New York branch was fined $20 million for financial misconduct in a joint action by the U.S. Treasury Department and the People's Bank of China, the central bank. The fine, analysts say, caused the bank to forfeit its plans for a listing in New York.
"In the future, I believe China's banks will have enormous potential, especially in the global equity markets, but they have a lot of cleaning up to do before then," Wilson said.
