25 December 2008

Big Trouble in China?

This story from the FT is as fresh as the seafood special at that fluorescent-lit dive off of Canal Street. But it's quite foreboding (choicest bits, like the fish cheek, in bold):

Bank of America has shelved a $3bn sale of China Construction Bank stock following objections from Beijing, igniting fears that some cash-strapped overseas investors could struggle to offload their lucrative holdings in the country's banks.

The US bank, which in 2005 was part of a wave of foreign investment into Chinese banks, last week hired UBS to help sell a chunk of Hong Kong-listed shares to reduce its overall -holding in CCB to less than 17 per cent.

The offer was priced at a discount of 15 per cent to CCB's current share price and was quickly covered by US and European institutional investors, said people familiar with the matter.

However, only hours before it was due to be unveiled on Monday morning, the share sale was pulled on the instructions of Ken Lewis, BofA chairman and chief executive, following a phone call with Guo Shuqing, his CCB counterpart, according to people familiar with the situation.

The precise reason for the 11th-hour abandonment remains unclear, but dealmakers in the region believe that the Chinese government was unhappy about the timing of the share sale, the first such attempted divestment by a foreign investor following the expiry of a lock-in period.

The share sale could have triggered a fall in CCB's share price just as Beijing is trying to garner support for its largest banks and arrest a stock market slide.

Foreign financial institutions, including Goldman Sachs, Dresdner Bank, Temasek and Royal Bank of Scotland, hold shares in China's leading banks worth billions of dollars and analysts say they could be tempted to sell down stakes to raise capital when their three-year lock-in periods start to expire from next month.

"Bank of America cancelling those trades has made the other foreigners realise they don't exit at their discretion; they exit at the discretion of the Chinese government," said one Asian dealmaker who asked not to be identified.

The Chinese government cannot prevent trading of Hong Kong-listed shares, but deal-makers said it was likely that BofA was warned of repercussions to its future business on the mainland if it carried out the sale.

If it's true that the Chinese government interfered with BofA's sale of its CCB holding, then the coming months should be very interesting from the short-China perspective. China may want an orderly dispersal of foreign banks' Chinese assets, but I doubt the market will grant China its wish.

Bank of America's CCB position was initially offered at a 15% discount, presumably to the HK$4.63 that shares of CCB closed at last Thursday.

So what did shares of CCB close at yesterday? HK$4.31, down only 6.9%. From a CCB-shareholder's perspective, it looks like China's intervention preserved some value, at least in the short-term.

The paragraph suggesting that the likes of Goldman Sachs and RBS may start selling off their stakes in Chinese banks in January also compels me to stay the short course on China.

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