Bulls Let Loose In the China Shop

All of a sudden, China's IPOs are white hot. Is this a bubble in the making?

Last fall, demand for shares of China Telecommunications Corp., the leading Chinese fixed-line phone company, was so anemic that the Beijing-based company shelved a planned initial public offering. Originally slated to raise $3.7 billion in October of 2002, the deal was yanked at the last minute after barely 20% of the offering was taken up amid investor concerns about industry overcapacity and regulatory risks. Even when the offering was almost halved in size, its eventual debut the following month was a flop, and the stock price closed below its IPO price on the first day of trading.

Other proposed mainland IPOs didn't fare much better last year. But how things have changed. Today, a clutch of Chinese companies are offering shares to outside investors by listing in Hong Kong and New York. And investors are literally lining up to buy them. Consider the debut of PICC Property & Casualty Co., China's largest non-life insurer. When it raised $696 million in late October without breaking a sweat, individual investors in Hong Kong queued up to apply for shares in a deal that ended up being oversubscribed 50 times. "We've seen a complete about-face -- a clear 180-degree change in sentiment," says Michael J. Berchtold, president and managing director at Morgan Stanley's Hong Kong office, which underwrote both deals.

PICC is only part of the China IPO parade. Minicar and helicopter maker AviChina Industry & Technology Co. plans to raise as much as $248 million with a listing in Hong Kong this month. Electric power company China Resources Power Holdings Co. is raising $350 million to cover acquisitions and expansion of its generating capacity. And China Life Insurance Co., the country's largest life insurer, is expected to pull in as much as $3 billion with dual listings in New York and Hong Kong before the year is out. That would make it the biggest IPO of a mainland Chinese company since China Unicom raised $4.9 billion in 2000.


Analysts say the rapid turnaround in investor attitudes toward IPOs stems from surging liquidity brought about by record-low interest rates, increasing optimism about the growth prospects of China Inc., and a healthier appetite for emerging-market risk. Investor enthusiasm, however, is confined to big Chinese companies listed on overseas markets, not the so-called China B-shares, or mainland stocks, that can be purchased by foreigners. Shanghai's B-share index is down about 2% this year.

Interest in Chinese shares -- and emerging-market equities in general -- hasn't been this strong since before the Asian financial meltdown of the late 1990s. The big difference this time is that China is by far the star attraction. Sure, the Thai bourse is at six-year highs, and the market for IPOs is strong across Southeast Asia. But that's a sideshow compared with the interest being generated by China. "Everyone thinks that no matter what happens in bourses elsewhere, China is the place you have to be," says Charles X. Lee, Hong Kong-based chairman & CEO of J.P. Morgan Chase China.

That has helped push China's H-share index of Hong Kong-listed companies up 80% since the beginning of the year. Bulls point to the economy, which is growing at an 8.5% annual clip. What's more, the China Securities Regulatory Commission has been making a concerted effort to improve transparency and corporate governance. For instance, in April 2002, it began forcing locally listed companies to appoint outside directors and report quarterly earnings. "A lot of officials I talk to realize the importance of developing the capital markets," says Wei Christianson, Credit Suisse First Boston's country manager for China.


Of course, there are plenty of skeptics. William J. Kaye, who manages hedge funds at Hong Kong-based Pacific Century Group, says the current IPO euphoria is simply a bubble, resembling similar rallies in 1993 and 1997, both of which ended in tears. Critics note even China Life, regarded as a blue chip, is about $21 billion in debt and that Beijing may still have to bail it out. "There is no investor recollection of the mistakes they made in the past," says Kaye. "Meanwhile China is saying, 'Let's get all this crap out the door while the fish are biting."'

The investment bankers behind the deals bridle at being portrayed as fast-buck artists. They insist that China's equity market is a wholly different animal from the anything-goes days of the 1990s. The outlook for Chinese companies, they add, is backed by impressive performance in terms of profit and revenue growth, not wishful thinking. "The quality of the corporates coming to market is very different from the Red Chip euphoria of '93-'94," says Peter Burnett, joint head of Corporate Finance Asia and investment banking at UBS Investment Bank. "These are real companies with real management and real operations."

Perhaps. But the fact remains that China's financial and capital markets are still very much a work in progress. "Just about every fund manager I know is overweight, and that's scary," says Ad van Tiggelen, deputy head of equity investments for ING Investment Management at the Hague, which has funds that are participating in the latest IPOs. "But if you don't have a certain amount of opportunism, you are killed in bull markets." For now at least, the opportunists have the edge. But few are willing to predict that China IPOs will still be the hottest investment on the planet 12 months from now.

By Frederik Balfour with Mark Clifford in Hong Kong

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