Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

China's city banks are hoping that a revived appetite for Chinese companies, and Hong Kong IPOs, will help them to sell shares to investors skeptical of their bad-debt levels.

Coming Back
Hong Kong IPO volumes, year-to-date (compared with same period for previous years)

Bank of Qingdao's offering, at a time when Hong Kong IPO volumes are at a five-year high, doesn't augur well. The first Chinese lender to go public since a $1.3 billion sale by Shengjing Bank late last year, the institution raised $607 million after pricing its IPO at the bottom end of a HK$4.75 to HK$5.21 range.

The price couldn't have gone any lower, even if the seller had been willing: The HK$4.75 level is exactly equal to Bank of Qingdao's book value, and Chinese rules prevent the sale of state assets for less than that floor.

Demand was limp even after a record 72 percent was taken up by cornerstone investors, institutions or well-known individuals who signal trust in an offering by committing to buy shares and hold them for a minimum period. Bank of Qingdao's cornerstone investors included Soul Htite, the American  co-founder of U.S. online peer-to-peer lender LendingClub. The bank's backers also include Italy's Intesa Sanpaolo , which held a 20 percent stake before the share sale.

A port city on China's eastern seaboard, Qingdao is a former German colony that is home to the nation's biggest brewer. More recently, the city has been better known for its role in a $10 billion fraudulent metals trading scandal that snared banks including Standard Chartered.

The struggle to sell Bank of Qingdao should hardly be surprising. The 14 Chinese banks listed in Hong Kong trade at an average of just 0.89 times book. That partly reflects doubts over the banks' bad-debt levels and concern that these will rise as China's economy continues to slow.

Under the Floor
Chinese banks traded in Hong Kong, price-to-book value

Bank of Qingdao's non-performing loans are a mere 0.9 percent of the total. That's lower than peer Bank of Chongqing's  at 1.14 percent and the average of about 1.1 percent for publicly traded Chinese banks in Hong Kong.

Chinese banks' troubled loans swelled to almost 4 trillion yuan ($628 billion) at the end of September, more than the gross domestic product of Sweden, according to figures released this month by the China Banking Regulatory Commission. While non-performing loans were 1.59 percent of outstanding credit, that rises to 5.4 percent if ``special mention'' loans where payment is at risk are included.

Chinese borrowers are taking on record amounts of debt to repay interest on existing obligations, according to Beijing-based Hua Chuang Securities, echoing the ``Ponzi finance'' conditions that U.S. economist Hyman Minsky saw as a predictor of financial crises.

Against this backdrop, two more city banks are set to test the Hong Kong market. Bank of Jinzhou, which has disclosed making loans to troubled solar energy firm Hanergy, began taking orders this week for an IPO that could raise as much as $943 million. Also in the queue is Bank of Zhengzhou.

They may face a tough sell. At the top end of the range, Bank of Qingdao would have raised $666 million. An unlucky number for sure.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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Nisha Gopalan in Hong Kong at

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Matthew Brooker at