China Construction Bank Begins $7 Billion Shanghai IPO


China Construction Bank, the China's top lender to the property sector, said on Tuesday it was launching an initial public offering of shares that is expected to be China's biggest, raising more than $7 billion.

Construction Bank, China's second biggest bank by assets, said it was starting consultations with institutional investors on pricing the offer in Shanghai of up to 9 billion new A shares, or 3.85% of its expanded share capital.

Analysts said the shares would be eagerly sought by millions of bullish Chinese stock investors who have poured into the market this year, causing the benchmark Shanghai Composite Index to double in eight months.

"Construction Bank shares will surely be over-subscribed and priced at the top of the indicative range -- this has been the case with almost all previous IPOs this year, and the market is still strong," said Qiu Zhicheng at Haitong Securities.

But the offer, and at least several other big IPOs expected by the end of this year, may cause China's stock market bull run to slow or stall by absorbing a huge amount of investment funds.

Construction Bank's IPO also looks set to cause a large though temporary jump in short-term market interest rates as banks set aside money for subscriptions.

Traders believe the offer could attract a record of over 2 trillion yuan (US$265 billion) in subscriptions, far surpassing the previous record for a Chinese IPO of 1.63 trillion yuan.

In response to the bank's IPO launch, the weighted average seven-day bond repurchase rate, a key measure of the availability of funds in the money market, jumped 0.2 percentage point to a two-month high of 3.88% on Tuesday.

Last week, sources close to the deal told Reuters that Construction Bank planned to price its A shares at 5.80 to 6.20 yuan apiece, which could raise 52.2 billion to 55.8 billion yuan ($6.9 to $7.4 billion).

That would eclipse the largest domestic IPO to date, an offer by Industrial & Commercial Bank of China, which raised 46.64 billion yuan last October in the domestic portion of a simultaneous offer in Shanghai and Hong Kong.

Jump Expected On Listing

A 5.80-6.20 yuan pricing range would give the A shares a discount of between 6% and 13% to Monday's HK$6.86 close of the bank's Hong Kong-listed H shares.

One source told Reuters last week that because of the strong stock market, the bank now hoped to price the A shares above the originally planned range.  But any discount at all would almost guarantee a big jump for the shares on their first day of trade -- the A shares of other top, dual-listed Chinese banks enjoy premiums of around 40% to 60% over their H shares.

At its Hong Kong share price, Construction Bank is valued roughly in line with other Chinese banks, at about 22.9 times analysts' forecasts of 2007 earnings, against 22.5 for ICBC, according to Reuters Estimates.

Reflecting its long-term growth potential in China's booming economy, it is far more expensive than major foreign banks -- Citigroup, for example, is at 9.9 times.

China Construction Bank said it would issue as many as 3.15 billion local currency A shares to institutional investors and the remainder to retail investors, but that the ratio might shift in favor of the retail tranche if demand were strong.

Institutional subscriptions to the offer will be taken on Friday and Monday, and retail subscriptions on Monday, the bank said. Funds frozen by the subscriptions will start returning to the banking system on Sept. 19.

The bank has mandated Morgan Stanley's investment banking joint venture China International Capital, China's top broker CITIC Securities, and Cinda Asset Management to underwrite its Shanghai IPO.
Macroeconomic Controls

Construction Bank had a capital-adequacy ratio of 11.34% at the end of June, well above the regulatory minimum of 8%. But rapid growth is straining the resources of many Chinese banks and Construction Bank said it would use the IPO proceeds to strengthen its capital base.

Construction Bank will remain state-run after its Shanghai offer, and its chairman pledged to operate in line with the government's priorities -- including restraining its lending as the government tries to cool the economy.

"China Construction Bank will comprehensively implement the central government's macroeconomic policies by controlling the size and growth of its lending, and strictly curbing credit to sectors that Beijing does not encourage," the official Financial News on Tuesday quoted Guo Shuqing as saying.

In recent years, executives at many Chinese banks have made such statements while lending and profits have continued to grow rapidly.

But the government announced on Tuesday that consumer price inflation soared to 6.5% in August, its highest level in more than 10 years, from 5.6% in July. Further tightening of monetary policy, and stronger government pressure for banks to rein in lending, could start to have an impact on earnings growth at Chinese banks.