Week 3 Assignment
Global Capital Markets
Read Closing Case: Industrial and Commercial Bank of China at the end of chapter 11 in your text.
• Why did ICBC feel it was necessary to issue equity in markets outside of China? What are the advantages of such a move? Can you see any disadvantages?
• What was the attraction of the ICBC listing to foreign investors? What do you think are the risks for a foreigner associated with investing in ICBC?
Industrial and Commercial Bank of China
In October 2006, the Industrial and Commercial Bank of China, or ICBC, successfully completed the world's larg- est ever initial public offering (IPO), raising some $21 billion. It beat Japan's 1998 IPO of NTT DoCoMo by a wide margin to earn a place in the record books (NTT raised $18.4 billion in its IPO). The ICBC offering followed the IPOs of a number of other Chinese banks and corporations in recent years. Indeed, Chinese enterprises have been regularly tapping global capital markets for the last decade, as the Chinese have sought to fortify the balance sheets of the country's largest companies, to im- prove corporate governance and transparency, and to give China's industry leaders global recognition. Since 2000, Chinese companies have raised more than $100 billion from the equity markets. About half of that came in 2005 and 2006, largely from the country's biggest banks. Shares sold by Chinese companies are also accounting for a greater share of global equity sales—around 10 percent in 2006 compared to 2.8 percent in 2001, surpassing the total amount raised by companies in the world's second largest economy, Japan.
To raise this amount of capital, Chinese corporations have been aggressively courting international investors. In the case of ICBC, it simultaneously listed its IPO shares on the Shanghai stock exchange and the Hong Kong exchange. The rationale for the Hong Kong listing was that regulations in Hong Kong are in accordance with international standards, while those in Shanghai have some way to go. By listing in Hong Kong, ICBC signaled to potential investors that it would adhere to the strict reporting and governance standards expected of the top global companies.
1. "Blocked Pipes," The Economist, October 4, 2008, pp. 73-75; "On Life Support," The Economist, October 4, 2008, pp. 77-78; and M. Boyle, "The Fed's Commercial Paper Chase," BusinessWeek Online, October 8, 2008, p. 5.
2. D. Waller, "Daimler in $250m Singapore Placing," Finan- cial Times, May 10, 1994.
3. Sources: J. O. Jackson, "The Selling of the Big Pink," Time, December 2, 1996, p. 46; S. Ascarelli, "Privatization Is Worrying Deutsche Telekom," The Wall Street Journal, February 3, 1995, p. A1; "Plunging into Foreign Markets, The Economist, September 17, 1994, pp. 86-87; and
The ICBC listing attracted considerable interest from foreign investors, who saw it as a way to invest in the Chinese economy. ICBC has a nationwide bank net- work of more than 18,000, the largest in the nation. It claims 2.5 million corporate customers and 150 million personal accounts. Some 1,000 institutions from across the globe reportedly bid for shares in the IPO. Total orders from these institutions were equivalent to 40 times the amount of stock offered for sale. In other words, the offering was massively oversubscribed. Indeed, the issue generated total demand of some $430 billion, almost twice the value of Citicorp, the world's largest bank by market capitalization. The listing on Hong Kong attracted some $350 billion in orders from global inventors, more than any other offering in Hong Kong's history. The domestic portion of the stock sales, through the Shanghai exchange, attracted some $80 billion in orders. This massive oversubscription enabled ICBC to raise the issuing price for its shares an reap some $2 billion more than initially planned.
Why did ICBC feel it was necessary to issue equity in markets outside of China?
The main reason why ICBC decided to issue equity in capital markets outside China was to fortify its balance sheet. Through the foreign issue ICBC intended to expand its investor base and gain access to markets which have strong demand for equity ownership. By issuing a foreign issue ICBC targeted to improve its balance sheet by acquiring large amounts of capital. A company is exposed to limited number of investors when dealing solely in domestic capital market thus limiting funds available to the issuing company which means that the market has limited liquidity. Through a global capital market the company has access to a large number of investors therefore leading to large supply of funds compared to domestic capital market. ICBC found it necessary to issue equity outside of China because it wanted to raise a large amount of capital. ICBC intended to raise $ 19 billion from the initial public offer which is a large amount of capital thus the need to issue the equity in a global capital market.
Another reason why ICBC decided to issue equity outside China was to improve corporate governance. Aggarwal (2011) ...
Global capital markets of China are examined.