CCB listing flags upheaval in industry reform

China Construction Bank (CCB) is expected to be the first among China's Big Four state banks to go public, following a mandate that could be issued as early as the fourth quarter of this year, according to bankers and economists.

In November last year, heads at three of the Big Four - Bank of China (BOC), CCB and Industrial and Commercial Bank of China - said they planned to list by 2005.

CCB, whose lending activity is focused on infrastructure projects, is widely regarded as the leading candidate for the first public listing because it has one of the strongest balance sheets of the group.

Morgan Stanley is the lead candidate to handle the listing. Morgan Stanley and CCB have a joint venture investment bank on the mainland, China International Capital Corp.

"CCB may have to lower its NPL (non-performing loan) ratio but it has the largest exposure to infrastructure projects." This is positive because of the hard assets backing loans. However, he noted that CCB needed to prune more staff than some of the other Big Four.

Other analysts see CCB and BOC as equally likely candidates for the first listing. "BOC and CCB offer investors the most appealing entry points into [China's] major banks," according to a report by John Yakas, an analyst at investment bank Fox-Pitt, Kelton.

The four banks must overcome significant problems before investors will feel comfortable buying shares. "There are still significant asset quality and capital adequacy issues to be resolved prior to flotation," Mr Yakas said.

First and foremost are their NPLs. Official numbers put the total at 1.77 trillion yuan (HK$1.65 trillion), or 25 per cent of loans outstanding.

However, some experts say Chinese accounting vastly understates the real figure, which could be as high as 50 per cent. Nicholas Lardy, of the Brookings Institute in Washington, said in a recent book that "China's four major banks as a group have a negative net worth and thus are insolvent".