ChiCom Bank Shares Rise 14% in First Day of Trading

According to the Constitution of the People’s Republic of China, the country is “a socialist state under the people's democratic dictatorship led by the working class and based on the alliance of workers and peasants. The socialist system is the basic system of the People’s Republic of China.” Yesterday, shares in the Bank of China (the PRC’s biggest foreign exchange bank) opened for trading in Hong Kong and rose 14% in the world’s largest IPO in six years. The sound one hears is Mao turning over in his grave.

Of course, China is only communist when it is rhetorically convenient. When Deng Xioping took over the country a quarter of a century ago, he began reforming its economy along market lines, not caring what color the cat was so long as it caught mice. At the same time, the Chinese Communist Party ensured that a state control and planning continued. In many respects, the Chinese political-economy is distinct from that of 1930s Italy only in its size.

The Hong Kong over-subscribed IPO of the Bank of China brought in US$9.7 billion. The stock opened at HK$2.95 (about 38 US cents) per share and closed at HK$3.38. That means that the capitalist, investment bankers who brought the stock to market screwed the workers and peasants of China out of 14.4% of the true value of the bank.

Anytime a stock rises on its first day of trading, it represents profits to the bankers not the company. If 10 million shares are issued at $5 a share, the company gets $50 million (less fees). At the end of that first day, if the stock rises to $6, the company is worth $60 million. Yet, the company doesn’t get that extra $10 million – it goes to the people who first bought the stock, the investment banks. Nothing the company did fundamentally in that one day made it worth 20% more – the bankers discounted the value of the company to get a bigger piece for themselves and reduce the score for the original shareholders.

In the end, however, the ChiComs may have the last laugh. The Chinese banking system if rife with bad loans, massive fraud that is only now being investigated, and it lacks anything like a modern computer system for handling its countless transactions. Wei Yen, China banking analyst at Moody's Investors Service, said, “The bank has been cleaned up, but nothing has given us confidence that they can maintain their asset quality. Right now, we are in a wait and see position.” Meanwhile, the AP notes, “Bank of China’s former chairman and president, Wang Xuebing, is serving a 12-year prison term for taking bribes. Liu Jinbao, a former president of the bank’s Hong Kong branch, was given a suspended death sentence last August for embezzlement -- such sentences are usually commuted to life in prison.” Perhaps, “wait and see” is a bit aggressive.

© Copyright 2006 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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