Archives 2006

China’s ICBC launches record IPO, shares soar

Chinese lender raises $21.9 billion, while shares climb 15 percent in market debut.

October 27 2006: 6:53 AM EDT

HONG KONG (Reuters) — Shares in Industrial & Commercial Bank of China, which is raising up to $21.9 billion in the world’s largest IPO, ended 15 percent higher in their Hong Kong debut on Friday after its stock sale generated huge investor demand.

The debut values the largest Chinese lender, making the first simultaneous Hong Kong and mainland China listing, at about US$139 billion, ranking it fifth among global banks, behind JPMorgan Chase & Co. (Charts) and ahead of Mitsubishi UFJ

China began listing its banks overseas last year, and all five mainland lenders trading in Hong Kong have drawn huge demand for their shares as investors downplay worries about the legacy of decades of state-directed lending.

Yang Liu, managing director at Atlantis Investment Management, bought ICBC’s IPO shares as a play on the Chinese economy, a rising currency and growing middle class, despite her preference for China Merchants Bank and China Construction Bank

“It’s too big to be ignored,” she said.

The stock leapt as high as HK$3.63, or 18 percent above its offer price, shortly after the Hong Kong market opening, compared with an IPO price of HK$3.07, before closing at HK$3.52.

ICBC was the most active stock in Hong Kong, but fell short of expectations for a first-day gain of as much as 20 percent.

“It’s better than what the average investor expected, given the size of the offering,” said Kent Yau, deputy research director at Core Pacific Yamaichi in Hong Kong.

ICBC’s domestically listed A-shares, however, disappointed investors by ending with just a 5.13 percent gain to 3.28 yuan, compared with an offer price of 3.12 yuan. The Shanghai shares rallied early by 10 percent before easing.

The Hong Kong debut was crimped by a 0.31 percent dip in the Hang Seng Index, which earlier on Friday hit a record high.

Big and bigger
ICBC raised $19.1 billion and is expected to expand the offering to $21.9 billion by exercising an overallotment option.

The stock sale was the most popular in Hong Kong and China history, and unmet demand for shares, combined with a surging Hong Kong market and an offering priced at a discount to peers, helped lift its first-day trading performance.

“Investors foresee China’s economy maintaining 10 percent growth every year before the 2008 Olympics in Beijing, so they’re buying mainland bank shares now to access that growth,” said K.C. Chan, executive director at money management firm KDB International, which bought ICBC shares for its clients.

The IPO, about 75 percent of which was sold to Hong Kong and global investors and the remainder in the mainland, surpasses Japan’s NTT Docomo, which raised US$18.4 billion in 1998, as the world’s largest share sale.

“This is the world’s largest IPO ever with the biggest ever subscription rate. That speaks volumes for the quality of the offer and for global investor confidence in China,” said Damian Chunilal, president of Pacific Rim global markets and investment banking at Merrill Lynch, one of ICBC’s underwriters.

Among its rivals, Bank of Communications trades 132 percent above its IPO price, while China Construction Bank and Bank of China are up 50 percent and 13 percent, respectively. On their Hong Kong debuts, Construction Bank closed flat and Bank of China ended up 15 percent.

Billions in bailouts
China has scrambled to get its creaky banks into better shape ahead of increased foreign competition set to kick in at the end of this year under its World Trade Organization obligations.

ICBC’s IPO attracted share orders worth about $400 billion for the Hong Kong portion of its deal and 780.7 billion yuan ($99 billion) for its domestic deal.

That should hearten another mainland lender, China CITIC Bank, which plans to raise as much as US$2 billion in a Hong Kong and mainland share sale by early 2007.

ICBC’s share sale was a bonanza for foreign institutional investors led by Goldman Sachs (Charts), which paid $2.58 billion in April for about 16.5 billion ICBC shares — a stake that is now worth $7.45 billion. Allianz and American Express (Charts) also bought stakes alongside Goldman that are now worth a combined $3.5 billion.

All three investors have three-year lockups on their shares.

ICBC’s IPO values the lender at 2.23 times its forecast book value. By comparison, No. 2 mainland lender Bank of China trades at 2.35 times 2006 book, No. 3 China Construction Bank trades at 2.66, and No. 5 Bank of Communications trades at 3.04 times book.

At the end of June, ICBC had total assets of 7.05 trillion yuan, 360,000 staff and more than 18,000 branches all over China.

China’s “Big Four” state-run banks have received billions of dollars in government bailouts to help ease their bad loan woes.

ICBC received a US$15 billion capital injection from Beijing in April 2005, helping lower its non-performing loan ratio to 4.1 percent as of June 30 this year, compared with Bank of China’s 4.2 percent and 3.51 percent for Construction Bank.

ICBC’s investors will be rewarded with dividends of 45 to 60 percent of net profit for 2007 and 2008, compared with 35 to 45 percent for both Construction Bank and Bank of China.

ICBC’s global IPO was sponsored by Merrill Lynch, China International Capital Corp., ICEA, Credit Suisse and Deutsche Bank

China Lawmakers Consider Extending Bking Supervisor Power

BEIJING -(Dow Jones)- China’s national legislature started deliberations Friday on revisions to the country’s banking regulatory law, a move that could broaden banking regulatory powers to include non-financial institutions and individuals, the official Xinhua News Agency said in a brief report.

The revisions could add power to China’s primary financial watchdogs, the China Banking Regulatory Commission and the People’s Bank of China.

Revisions to Chinese laws are often a long and drawn out process. China’s corporate bankruptcy law was approved in August by the Standing Committee of China’s National People’s Congress after 12 years of drafting and deliberation.

China’s Spending on Research and Development Growing Faster than U.S.

While the United States still has a bigger share of the global R&D market, second-ranked China is gaining ground.

U.S. companies are falling behind on research-and-development spending, while their Chinese counterparts have upped their investments in recent years, according to a new report.

The study, conducted by R&D magazine and Battelle, a Columbus, Ohio-based research firm, could spell trouble for small businesses that benefit from local R&D activity.

This year, the United States is responsible for 32.4 percent of global R&D, but that number is down slightly from 32.7 percent in 2005, and is expected to drop to 31.9 percent in 2007.

China ranks second for most dollars spent, and while it’s only responsible for 13.4 percent of the world’s R&D, Battelle projects that number will rise to 14.8 percent in 2007. The percent changes may be small, but on a global scale, they translate into large figures — R&D magazine reports that global spending on R&D topped $1 trillion in 2006.

“There still is a considerable gap, but it’s closing,” Jules Duga, a senior Battelle research scientist and co-author of the report, said in a statement.

Chinese growth has been fueled by the liberalization of Asian economies and the ongoing development of a highly educated, technology-oriented population, according to Battelle.

The report explains the results in terms of an evolution in international competition: After the global arms race subsided, focus shifted to a “hands race” for lower-cost manual labor. Now shifting once again, the world is entering a “head and brains race” for technological advancement.

Falling behind in the “race” could have a negative impact on small businesses in the United States. Earlier research has shown that small-business formation and growth is directly linked to local R&D.

A 2002 study published by the Small Business Administration showed that communities with larger amounts of university R&D activity are home to more start-ups, and those companies significantly benefit from R&D during their early stages of growth.

This is due in large part to a “spillover effect” of knowledge and technology to the surrounding area.

The SBA research found that there is generally a two-year lag between the year of R&D expenditure and the spike in the launch and growth of new firms, during which the spillover takes place. That means that universities, government laboratories, and corporations need to consider changing trends of today in order to protect the vitality of small businesses in the future, according to the SBA

“These challenges can be accommodated only by long-term strategic investment and will,” Duga said.

Ex-Motorola China head joins Pepsi to sell cola

SHANGHAI (Reuters) – Former China president of mobile phone maker Motorola Inc. Daniel Shih has joined PepsiCo Inc. to help the U.S. company to sell its cola products in China, industry sources said on Thursday. Shih is now the president for Pepsi’s beverages business in China, two sources familiar with the situation told Reuters, a market where Pepsi is facing tough competition from its U.S. rival, Atlanta-based Coca-Cola Co.

Shih, a Taiwan-born Amercian, joined Pepsi before the week-long Chinese National Day holiday last week and will report to Zhu Huaxu, current China chairman of Pepsi, the sources said.

“Shih will be working very closely with Zhu and finally Shih will take over all Zhu’s posts, becoming his successor,” said one Beijing-based source close to Pepsi.

Shih, who left Motorola late last year, will take over Pepsi’s China operations in the second quarter of 2007, when Zhu plans to retire after working for Pepsi for nearly a decade in China, the second source said.

Multinational corporations, from global banks to toy makers, have poured tens of billions of dollars in the past few years into China, the world’s fourth-largest economy where personal savings have reached a total of roughly $2 trillion.

Global chief executives have long complained that a shortage of senior industry talent may be the biggest challenge that companies face in China. Foreign firms see China work experience and language skills as vital when hiring senior executives.

The first source said Pepsi’s Zhu first brought up the idea of retirement with management late last year, after which Pepsi began to cast around for a successor.

“Pepsi is a big multinational corporation in China, so it needs some time to assure the handover … will be done very smoothly,” said the source, adding that profit margins in China’s beverage sector may be larger than in its electronic industry.

China’s pension system covers more people

China’s national pension system was covering 182.42 million people by the end of September, up 4.3 percent year on year, the Ministry of Labor and Social Security said in Beijing Thursday.

In the first nine months of the year, some 7.54 million people were newly covered by the pension system, a spokesperson of the ministry told Xinhua.

A total of 339.4 billion yuan (43 billion U.S. dollars) were paid out to retirees between January and September, the spokesperson said, adding that no overdues have been reported so far.

The pension system received revenues totaling 403.5 billion yuan in the first nine months, an increase of 16.1 percent over the same period of 2005.

Source: Xinhua

Microsoft expands R&D team in China

SHANGHAI, China — Microsoft is planning to boost its R&D division in China by hiring 500 new engineers.

The recruits will join a team that has doubled in the last year to about 1,200. Within three to five years, Microsoft plans to increase its staff to 3,000 workers and invest $100 million in an effort to make China one of its core R&D bases.

The expanded staff will focus on mobile communications and embedded systems, Internet applications and services, digital entertainment and servers. Everything from basic research to product development will be conducted here in cooperation with local companies.

Yaqing Zhang, president of Microsoft’s R&D group in China acknowledged that many Chinese engineers are still inexperienced, especially in managerial ability. Hence, half of the new recruits will come from overseas or from within the electronics industry, instead of from China’s growing pool of job-seeking graduates.

China’s Leadership Gap

Summary: After 28 years of reform, China now faces accelerating challenges of an unprecedented scale. Of these, none is more critical — or more daunting — than nurturing a new generation of leaders who are skilled, honest, committed to public service, and accountable. Without them, Beijing’s public promises of a prosperous, democratic future will go unfulfilled.

John L. Thornton is a Professor at Tsinghua University’s School of Economics and Management and its School of Public Policy and Management, in Beijing, and Director of the university’s Global Leadership Program. He is also Chair of the Board of the Brookings Institution. He retired as President of Goldman Sachs in 2003.

RECRUITING THE NEXT GENERATION OF REFORMERS

After 28 years of reform, China faces challenges of an unprecedented scale, complexity, and importance. China has already liberalized its markets, opened up to foreign trade and investment, and become a global economic powerhouse. Now its leaders and people must deal with popular dissatisfaction with local government, environmental degradation, scarce natural resources, an underdeveloped financial system, an inadequate health-care system, a restless rural population, urbanization on a massive scale, and increasing social inequality. Most of these problems, of course, have existed throughout the period of reform. What is different now is that the pace of change is accelerating while the ability of the state to manage that change is not keeping pace.

Solving any one of these problems by itself would be a formidable task. But Beijing must deal with all of them at once. Because China’s government is a one-party system with minimal popular participation, success depends on the energy and ideas of its leaders. Yet the Chinese government today finds it harder than ever to attract, develop, and retain talent. Graduates from the country’s top universities, who once would have filled government posts, are instead choosing to take jobs in the private sector. Ironically, by creating new opportunities for talented people, China’s three decades of reform have made undertaking new reforms more difficult. Moreover, the structure of the country’s bureaucracy stifles initiative and promotes mediocrity. Worse, many officials, from the village to the central government, are corrupt, eroding the government’s effectiveness and feeding popular discontent with the system.

Of all of China’s challenges, none is more critical — or more daunting — than that of nurturing a new generation of leaders who are skilled, honest, committed to public service, and accountable to the Chinese people as a whole. Unless China manages to produce such leaders, Beijing will fail to meet the country’s challenges, and its public promises of a more prosperous and democratic future will remain unfulfilled.

MANDARINS AND MULTINATIONALS

For much of China’s history, the central bureaucracy attracted the country’s best and brightest. The famous imperial testing system for identifying future mandarins provided what was, at least in part, a merit-based route to social advancement: government service, especially when combined with personal connections and keen political skills, was the fastest path to power and wealth. Although the powerful state that emerged after the ascendancy of the Chinese Communist Party (CCP) in 1949 changed much in Chinese society, it only reinforced the bureaucracy’s near monopoly on talent. Today, however, many ambitious Chinese no longer regard a government job as the best route to success. And those who try to pursue careers in government after spending time in the private sector often find that their way is blocked.

China’s educational system continues to identify the best minds (or at least the best test takers) and send them to top universities. Once there, however, most students now study what they find most interesting or what they think will be most lucrative instead of taking courses designed to prepare them for …

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Upon entering the 21st century, the Chinese Government made timely diplomatic-strategy re-adjustments and started to push for better relations with its neighbouring countries, seeking mutual trust politically and co-prosperity economically.

The Immigration and Customs Enforcement agency is planning to hire 2,000 agents to work at its division responsible for controlling illegal immigrants and promoting immigration law enforcement.

An internal email memorandum told current employees that the hiring will begin in Miami, Los Angeles, Dallas, Houston, and Phoenix, according to GovExec.com.

In addition to a heavy concentration in the Southwest, other positions may open up in New York, Chicago, Seattle, and San Francisco.

The 2,000 openings would expand the Office of Detention and Removal Operations by 13%, to nearly 17,000 employees. The new job listings will be available at USAJOBS.gov.

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China-ASEAN FTA necessary and beneficial

Upon entering the 21st century, the Chinese Government made timely diplomatic-strategy re-adjustments and started to push for better relations with its neighbouring countries, seeking mutual trust politically and co-prosperity economically.

As part of the effort, the process of bringing about a China-ASEAN (Association of Southeast Asian Nations) Free Trade Area (FTA) is being driven ahead.

As an arrangement for mutual benefits, the bidding for the FTA is powering the all-around economic co-operation between China and ASEAN that, in turn, works as a stabilizing factor for the region.

Since the 1990s, the integration of regional economies has had strong momentum a hallmark of accelerated economic globalization. Regional economic organizations such as the European Union (EU) and the North American Free Trade Area are acquiring increasingly important positions in the world economy. On the other hand, free trade agreements, those signed between developed countries in particular, are posing a serious challenge to both China and ASEAN because the preferential tariff rates granted to each other by free trade agreement members erode the economic and trade advantages enjoyed by developing nations.

China joined the World Trade Organization (WTO) in December 2001 after more than a decade of painstaking negotiations. As a result, the focus of the country’s foreign trade and economic strategy began to shift to regional economic co-operation.

China’s WTO membership means that the country’s economic development will become increasingly responsive to the world economy.

At the moment, regional economic integration is picking up speed and China would risk being marginalized if it did not join this process.

If China failed to embrace regional integration, it would find its global competitiveness significantly diminished.

Fortunately, involvement in regional economic co-operation constitutes a new focus of the nation’s overseas economic strategy.

In the meantime, the economies of the ASEAN members started recovering in 1999 from the ravages of the 1997 Southeast Asian financial crisis, which dragged on the once fast growing economies of the member states. Coincidentally, while ASEAN rose out of economic stagnation, the Chinese economy entered a phase of high-speed development.

Doubtless, Chinese demand helped facilitate their economic growth. In light of that, the nature of ASEAN’s economic recovery recommended a strengthening of relations with China.

It then became obvious that pursuing a China-ASEAN FTA was a wise strategic option beneficial to both sides.

In November 2002, therefore, the Chinese and ASEAN leaders signed the Framework Agreement on Comprehensive Economic Co-operation between China and ASEAN and decided that a China-ASEAN FTA would be set up in 10 years. The process of establishing the China-ASEAN FTA was thus set in motion.

Starting on January 1, 2004, the two parties began implementing an Early Harvest Plan (EHP), cutting tariffs on more than 500 products, as part of the effort to facilitate the birth of the FTA.

The Chinese and ASEAN economies complement one another as shown by the results of the EHP. ASEAN’s tropical fruits and China’s apples, pears, cabbages and potatoes are competitive respectively. The China-ASEAN FTA plan has already produced good initial results.

At the Eighth China-ASEAN Summit convened on November 29, 2004 in Vientiane, capital of Laos, the two parties signed a package of agreements on trade in goods and dispute settlement, laying down foundations for standardizing tariff cutting and resolving disputes.

Starting from July 20, 2005, China and ASEAN began to cut tariffs on more than 7,000 products, which marked the coming of the phase of substantial tariff reduction between China and ASEAN in the run-up to the establishment of the FTA.

The Framework Agreement on Comprehensive Economic Co-operation between China and ASEAN has helped advance bilateral trade, with the China-ASEAN trade volume crossing the threshold of US$100 billion for the first time in 2004 and hitting US$130.37 billion the next year.

In addition, the two sides have been co-operating closely in direct investment, services and technology, which has also yielded significant results.

From the point of view of regional economic integration, the future Asian economic integration should be based on a more extensive and more economically powerful regional co-operative entity, of which the China-ASEAN FTA is a vitally important component.

Once founded, China-ASEAN FTA will be the largest FTA in Asia, the most populous FTA in the world and the biggest FTA in the developing world. The China-ASEAN FTA is expected to accelerate the trend of regional integration in Asia and, in turn, will have positive impacts on the world economy.

The author is a researcher with the Economic Research Institute under the Ministry of Commerce.