THE CHINA
DREAM
OF GULF INVESTORS

Dr Eckart Woertz 

The IPO of China's biggest lender, the Industrial & Commercial Bank of China (IBCB), coming up at the end of October, once again highlights the growing interest of Gulf investors in one of the world's fastest growing economies. The list of subscribers reads like a who's who of Gulf investors: the investment authorities of Kuwait and Qatar alongside a consortium of prominent individual investors from Saudi Arabia headed by Prince Alwaleed bin Talal and his company, Al Azizia Commercial Investments. 

They are joined by other heavyweights on the international scene; an American-German consortium of Goldman Sachs, American Express and Allianz picked up 10 percent of the shares prior to the IPO in January, while Hong Kong business magnate Li Ka-shing invested $205.5 million via Hutchison Whampoa and another of his companies. 

With expected proceeds of $20 billion for about 15 percent of the company's shares, it will be the biggest IPO worldwide since that of NTT DoCoMo in 1998 which raised $18.4 billion. Mainly owned by China's Ministry of Finance and a Chinese government investment arm, the bank will have a value of $130 billion and rank number sixth worldwide in terms of market capitalization. The Kuwait Investment Authority will be the biggest single investor in the IPO with a share worth $719.4 million. 

After the dire years of low oil prices in the 1980s and 1990s, there is no doubt that Gulf investors have deep pockets again. The net oil revenues of all oil exporting countries have been more than $650 billion in 2005. Their accumulated current account surplus amounts to 41 percent of the current account deficit of the world's great debtor, the United States, and is only slightly behind Asia, which makes up 47 percent of the US deficit. With the US current account deficit now beyond $800 billion and no end in sight, there are, naturally, increasing worries about dollar weakness as well as interest in investments outside the dollar realm. 

China seems to be a natural candidate: Since the mid-1990s, in real terms, its economy has grown continuously at around nine percent annually and so has its trade with the GCC countries. On an absolute base it may not be the most important trading partner yet, as with six percent it is still behind the EU (19.4 percent), Japan (15.1 percent) and the US (10 percent). But as China's foreign trade with the GCC has been growing by more than 30 percent annually in recent years, this rank order may well change in the future. Thus, it is no wonder that GCC investors want to have a piece of the pie.

Kuwait and Aramco are investing in refineries in China in order to foster long-term customer relations and enhance the value chain of their oil production. Besides, the interest of Gulf investors in Chinese banks is intense. Prince Alwaleed applied for a $2 billion stake in Bank of China's IPO in July and received an allotment of $390 million; he has also expressed his interest in the upcoming IPO of the China Merchants Bank. 

While China is certainly a force to reckon with and an interesting portfolio addition, Gulf investors may well take a second look behind the all-pervasive China hype. The dream of everlasting hyperbolic economic growth was last seen during the Nasdaq stock bubble in 2000/2001 and the GCC stock bubble this year, and has led to unpleasant awakenings in each case. China might not be an exception. As a rule, one can say that when everybody is invested in a market and emphatically thinks he is right, something goes terribly wrong shortly after. 

A rare voice of skepticism was Joe Studwell's book "The China Dream" in 2002, where he argued that since the 19th century, the most populous country of the world has been the projection screen for fantasies of foreign businessmen that never materialized - and this time it might not be different. 

Studwell mainly pointed to unchecked credit growth, the paralyzing effects of an ever-present bureaucracy, dubious statistical data, and an ailing state sector which is still very important in the economy but hardly gets attention besides the successful and celebrated export industries. 

No doubt, Studwell has been wrong so far - China has continued to grow rapidly since 2002 and widespread foreign investor frustration has not been discernible. The issue of bad loans has been addressed in a government bailout and the ratio of nonperforming loans at ICBC, for example, has decreased from 34 percent in 2000 to only four percent today. 

Still the expansion of credit and the dependence of China's economy on exports, especially to the US, are worrying. While the share of exports to GDP was 20 percent during 1996-1999, it is now at 34 percent, and especially after 2001, exports have been growing at 30 percent annually. A simple calculation suggests that most of China's growth has been depending on this growth in exports and developed domestic markets still remain limited. 

This could become critical in case the US economy should cool down. Recent data from the US housing market suggests exactly this. Once the American consumer cannot borrow against ever rising house prices anymore, China's most important export market would be in trouble. Given the importance of exports for the Chinese growth model, this would mean declining growth rates and a potential re-emergence of the bad loan problem. 

For Gulf investors this means that they have to look out. China is certainly an important portfolio addition, but its growth story is not as impeccable as is usually portrayed. By trying to avoid dollar weakness in the US, Gulf investors could be hit by dollar weakness and declining exports in China instead. 


It became a reality…

On the 27th of October 2006 ICBC was simultaneously listed on both the Hong Kong and Shanghai Stock Exchanges – the first company ever to do that. It turned out – to no one’s surprise – to be the world's largest IPO so far. It beat the previous record of US$18.4 billion in 1998 by Japan's NTT DoCoMo.

ICBC raised US$14 billion in Hong Kong and another US$5.1 billion in Shanghai and because of the heavy subscriptions, the over-allotment placements were exercised and ICBC's total take rose to US$21.9 billion, US$16 billion in Hong Kong and US$5.9 billion in Shanghai.

At the end of its first day of trading in Hong Kong the bank’s shares closed up 15% at HK$3.52,. ICBC’s market capitalisation at the end of trade based on its Hong Kong shares was US$156.3 billion, making it the world’s fifth largest bank.

ICBC’s Shanghai listing made a rather more modest gain of 5.1% from the offer price of RMB 3.12.

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