The numbers are dazzling: $19.21 billion. Possibly even topping $22 billion when the dust settles. The initial public offering (IPO) from the Agricultural Bank of China, listed in Shanghai and Hong Kong, could possibly roar into the record books as possibly the biggest IPO in history. Not just Chinese history, but world history.
This is a transformational moment, an exclamation point on China’s move to a market economy, away from the destructive state socialism espoused by Mao Zedong and generations of Chinese communist leaders. What better illustration of this moment than the world’s leading bankers holing up in Beijing to prepare an IPO for a bank founded by Mao to cater to Chinese rural peasants?
The world’s business dailies splashed the news of its IPO breathlessly on its front pages. Leading global institutional investors—including the Qatar Investment Authority and the Kuwait Investment Authority—lined up to buy shares. And when it went to market and underperformed on the opening day, this one small rural bank became the talk of global financial pundits.
Of course, AgBank is no longer small. With assets larger than the entire public output of India and more customers than all the citizens of the United States, combined with Chinese government ownership and the implicit “security guarantee” that it implies, it’s not a surprise that lenders saw extraordinary potential in AgBank, even though it is commonly thought of as the weakest of the big four state-owned Chinese banks. It is seen by many institutional investors as a way to “play” the China growth story in the long-term.
If AgBank achieves its goal of becoming the biggest IPO in history, it will knock off the current holder of that distinction—The Industrial and Commercial Bank of—yes, you guessed it—China. That IPO brought in $21.9 billion in 2006. Somewhere, Mao Zedong is turning in his grave.
Regardless of the final number, the AgBank IPO is a seminal economic and financial event that yields four key lessons for the future of Asia, the Middle East and the wider global economy, and one parenthetical cautionary note about Middle East sovereign wealth funds.
1) The West Asia-East Asia Nexus
The two biggest investors in the AgBank IPO are the Qatar Investment Authority (QIA) and the Kuwait Investment Authority (KIA). The QIA put up $2.8 billion and KIA comes in at $800 million. The biggest investors in the previous record-breaking Chinese IPO were also Middle East investors. This is symptomatic of a broader trend: the growing West Asia-East Asia commercial, economic and strategic nexus.
West Asian Middle East countries and East Asia are trading with each other more robustly, investing across each other’s borders, driving growth across Asia, contributing to global economic growth, and building closer commercial and strategic ties. Last year, China surpassed the United States as the biggest exporter to the Middle East.
A glance at the trade profiles of the biggest economies of West Asia—Saudi Arabia, Iran, the United Arab Emirates and the GCC states—will reveal a geo-commercial profile that is increasingly Asian. The most important commodity driving Gulf economies—oil—mostly heads east to Asia.
In the case of Qatar, the QIA’s swelling cash coffers that allowed them to make such a massive investment in AgBank owes mostly to Asian purchases of Qatari Liquified Natural Gas (LNG).
As for Iran, its notable economic woes would be much more difficult were it not for Japanese, Indian and, most importantly, Chinese oil buyers. And the future of its oil sector is largely dependent on Chinese state oil companies, the last majors standing willing to invest significantly in Iran’s exploration and production.
West Asia’s biggest economy—Saudi Arabia—is linking closer to East Asia’s biggest economy, China. When King Abdullah of Saudi Arabia took the throne nearly five years ago, his first state visit was not to the White House and long-time ally the United States or a fellow Arab state, but to China and India. A significant amount of Chinese refining capacity is being shifted to meet the standards of Saudi crude oil, and joint ventures between Saudi Aramco and Chinese state companies in petrochemicals and refineries are linking the two giants closer together.
There is much talk of a New Silk Road linking the Middle East and East Asia. This trend is becoming even more real, and is contributing significantly to regional—and even global—growth.
2) Asia Picking Up Global Economic Slack
US President Barack Obama often complains that too much of world economic growth is shouldered by the American consumer. But if the AgBank IPO is an accurate reflection, Asia is holding its own. The most significant IPOs in the past year have all come from Asia, and the growth in demand for commodities and industrial goods is highest in Asia. And the International Energy Agency (IEA) reports that China has officially become the heaviest energy consumer in the world, surpassing the United States, IEA chief economist Fatih Birot called it “a new age in the history of energy.”
Julian Mayo, an Asia specialist at Charlemagne Capital, told the Wall Street Journal: “The fact that the Chinese government is able to sell a vast amount of shares in what is clearly not its highest quality bank, during volatile markets, shows how the baton is passing from the developed to emerging markets.” This is indeed true, but the most consequential piece of that emerging market growth is in Asia.
A recent report indicating a potential Japanese state strategy to support its corporate superstars to grow their market shares in developing countries will only bolster global growth, with Asia once again in the forefront.
3) China’s Growth Strategy Broadening
China’s startling growth story over the past two decades has largely been a story of a few Chinese coastal cities—Shanghai, Ghaunghzou, Dalian, to name a few. A newly revitalized AgBank that reaches out to the Chinese interior could contribute to a more balanced growth picture in China, supporting social stability, and also driving up demand for consumer goods and services, and growing the vaunted Chinese middle class.
A flurry of reports emerging from China in the past two weeks suggests that more Chinese are staying closer to their homes to find work, halting the flights to the coasts, as more companies set up shop beyond the relatively expensive coastal manufacturing cities.
If the Chinese interior comes even close to the dazzling success of its coasts, the implications for world growth will be stunning
4) The China Oil Panda and the Middle East
When it comes to oil and gas demand, China is a bit like its national treasure, the panda, which must eat bamboo for 16 to 18 hours a day to survive. Chinese state planners likely feel that they are spending 16 to 18 hours a day ensuring that they have enough energy supplies to meet the needs of their growing economy. Hence, the tireless Chinese push into Africa, Latin America, and Middle East energy markets.
According to the International Energy Agency, 92 percent of the increase in oil product demand through the year 2030 will come from non-OECD countries. Of that figure, some 40 percent will come from China.
Thus, the growing strategic links between China and key oil-producing West Asian countries will only strengthen over the next two decades. Look for the China-Iraq relationship to grow substantially as Iraqi oil supplies start meeting their vast potential, and Chinese state-owned oil companies—the biggest winners in Iraq’s post-war oil bonanza—begin to cash in. Look also for China to consolidate its position as Saudi Arabia’s most important strategic energy partner.
(Cautionary Note for Middle East funds)—The Qatar Investment Authority is making a huge bet on AgBank. Its reported $2.8 billion share dwarfs all other investors. The next closest is the Kuwait Investment Authority, with a not insignificant $800 million take. In third place is the UK’s Standard Chartered at $500 million, and in fourth comes Rabobank of the Netherlands at $250 million.
According to the Sovereign Wealth Fund Institute, QIA’s assets amount to $65 billion. That would mean QIA is putting about 4 percent of its eggs into the AgBank basket. On the other hand, Kuwait’s $800 million investment is a much smaller dent in its $200 billion-plus fund.
Arab sovereign wealth funds were burned by their purchases of US bank shares during the financial crisis, and have been hit hard by global financial turmoil. AgBank is in no danger of default, but it is considered the weakest of China’s top four banks, and is, for now, a “potential play” with, albeit, an important state backer.
Even before its disappointing opening and lackluster demand, there were plenty of skeptics. The New York Times reported one week before the IPO that “skeptics say the bank’s customer service remains abysmal, and its government mandate to serve farms and peasants dooms it to the low-growth ghettoes of the Chinese economy. Bank officials insist, however, that only about one-third of all business is rural-based.”
Meanwhile, the prestigious Lex column in the Financial Times also noted before the IPO that “Chinese banks have yet to pay the price for years of heavy lending” and “more bad loans beckon, as do lending constraints.” It concluded by saying that “AgBank was able to claim the mantle of the biggest IPO in part because demand from Middle East sovereign wealth funds. The latter have taken some horrid hits on their past banking investments. This one, regardless of size, may be no different.”
Afshin Molavi – Journalist and senior fellow at the New America Foundation, a non-partisan think tank in Washington DC. His essays and articles have appeared in dozens of publications from the New York Times to National Geographic to Foreign Affairs. He has been based in Riyadh, Jeddah, Dubai and Tehran.
