Cover Story-r1:AMM grid in qxp 12/24/09 9:35 AM Page 35
Temasek Holdings of Singapore alone owns 6.5% of CCB and 4.1% “The market is expecting a process of clarification from the Chinese
of BOC. The Singaporean sovereign wealth fund has a long history in authorities about the levels of tier-one capital and total capital they will
China and recently revealed plans to divest out of developed markets, require, what kinds of instruments would qualify and the timeline for
so it would make sense for it to remain invested. issuance,” says Jesudason.
But the agency has also been criticised for the amount it allocates to If Beijing does not do so, it risks stoking investor concerns over equi-
financial investments, which constituted roughly 33% of its portfolio as ty dilution. That could lead to a downward spiral as bank valuations
of March 31. tumble, which in turn will necessitate larger equity fund-raising and
“At a time where the Chinese government would like to draw capital exacerbate investor worries even more.
into its banks, it’s not likely that a world-class name like Temasek would “It will be important to get the first share sale right and set a positive
run for the door. But when it comes to the new shares, it would come tone for the other issuers. If the first issue is well-managed and well-
down to price,” says a senior banker familiar with the agency. “They received, it will be great for the equity markets and the banks,” says
could be looking to reweight out of one stock in favour of another.” Jesudason.
In response to questions, Temasek directed Asiamoney to the Uncertainty also exists over how well the Shanghai and Hong Kong
Temasek Review 2009. “Temasek is flexible to investment/divestment stock markets will hold up in the first half of 2010. Both markets did
to achieve long term sustainable value and attain shareholder value.” well in 2009, rising 80% and 50% respectively from January to mid
Ultimately, the interest of Temasek and other core investors will December. But many fund managers are concerned that the rich valua-
depend on the relative value of the new shares on offer. And that will tions now are not supported by the global economic recovery.
come down to how the banks’ shares are trading, and what discounts Yet for all these uncertainties it is wise to remember that these deals
new issues offer. are not vital for the survival of China’s banks. Beijing has enough
Ascertaining the correct discount level for new rights issues – money to bolster their capital ratios itself if needed.
assuming that is the route taken – will be vital to the success of the It is a fact for investors to ponder as they consider how much they
deals. Offer too much and the overall stock price might suffer, while too can press for discounts on existing stock valuations. Beijing might want
little could see the deals falter. And that would be viewed very dimly by to see new capital put into these banks, but not at any price.
Beijing. It will also not want its banks to conduct multiple new funding-rais-
Market participants are cagey when asked to estimate where dis- ings, a sharp contrast to the approach of Japan’s banks (see box on pre-
counts would be appropriate. Ren Wang, co-head of the financial insti- vious page).
tutions group at UBS, is one of the few willing to take a punt: “In Hong “One thing the Chinese don’t want to do is tap the market once and
Kong, the average discount for rights offerings is about 30% to 40% then do it again six months later,” says Vong.
and it has been quite consistent. Chinese banks could give such a dis- For now Beijing is keeping its bank plans under wraps. But whatever
count.” the final decisions, one thing is clear: when it comes to financing its
Another senior banker thinks that tighter discounts are possible. lenders, the nation remains as bold as ever.
“The discounts will be in the double digits but under 30%,” he says.
“Most likely they will be somewhere between 12% and 28%.”
Of course, the very knowledge of these looming deals will affect the
rebalancing plans of fund managers. As a result, expect to see some
marked change in market positions.
“You don’t want to sell and then find out later that the rights offer-
ings are attractively priced and you’ve missed out,” says Jesudason.
“Investors will be working hard to try and assess the implications of
potential rights issues.”
It’s likely that Beijing has reconciled itself to the fact that not all of
its core investors are going to sit still during this process.
“From the last round of sell downs what has become clear in the
mind of the Chinese bankers and regulators is that the money of sover-
eign wealth funds and global bank investors remains focused on
returns,” says Vong. “For all their sentiments about long-term coopera-
tion, most of the foreign banks sold out to their “strategic” stakes.”
The potential for investors to have itchy feet is no way soothed by the
lack of information from Beijing.
Uncertainties abound, including the order of issuers, the exact size
of funds they will need, and whether they will pre-fund themselves in
anticipation of continued high lending needs.
Then add the volatility that this level of issuance could prompt both
at individual bank and overall market level, and a global economic
environment that remains fragile, and it is far from certain how suc-
cessful these deals will be.
The likelihood of new capital raisings is already an overhang on
China’s financial stocks, which means lenders may have to give deeper
discounts to entice sceptical investors.
A way to mitigate some of that overhang would be for the Chinese
government to reveal more about its capital-adequacy ratio plans and
give a rough issuance schedule for its banks.
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