Rejuvenation Led By Bank Of China's IPO

Bank of China's Shanghai-listed A shares soared as much as 31 percent on their trading debut Wednesday, helping to drive Shanghai's benchmark index to a two-year high and closing at a premium to its Hong Kong shares. The A shares closed at 3.79 yuan (HK$3.68) apiece, 23 percent up from the 3.08 yuan price set on June 20, with 1.8 billion shares changing hands. The benchmark Shanghai Composite Index, which included BOC on the bank's trading debut, climbed 2.2 percent to 1,718.56 points. The stock closed at a 4percent premium to the H shares, which slid 3.4 percent to HK$3.55. Mainland Chinese investors are returning to the stock market after the ending last month of a year- long ban on local listings imposed by the government while companies underwent share reforms.

BOC sold 6.5 billion shares at 3.08 yuan each to raise 20 billion yuan before listing Wednesday in Shanghai. The bank last month sold 25.6 billion shares at HK$2.95 each to raise US$11.2 billion before a Hong Kong listing. Investors in the Hong Kong stock were frustrated by the falling H-share price as they had expected a gain in line with the mainland increase. The spread between the A and H shares is mainly because there is no arbitrage mechanism in play, although one was proposed by former Hong Kong Exchanges and Clearing chairman Charles Lee Yep-kwong earlier this year. Arbitrage would allow investors to exploit the difference in value between two markets and so help to reduce the price difference.

The mainland and Hong Kong markets are serving different investors. H-share buyers are mostly institutional investors, while A-share purchasers are mainly the high net-worth retail investors. The bank, China's second largest lender, raised US$11.2 billion in an IPO in Hong Kong in May that was the world's fourth-largest ever.

The bank's IPO marks the beginning of a major transition for the markets, which until now have been dominated by manufacturing giants like China Petrochemical Corp., or Sinopec. With its listing, Bank of China displaced Sinopec as the Shanghai Stock Exchange's biggest listed stock, comprising almost 20 percent of its overall market capitalization. Other big state-owned banks such as ICBC (Industrial and Commercial Bank of China) and China Construction Bank will follow. So in the near future, the most important shares for the market will surely be financials. Regulators have said they expect IPOs by other major corporations to improve the quality of companies listed on the mainland Chinese exchanges, boosting investor confidence in China's markets, which have languished for years amid trading and corporate governance scandals.

Like other state-run commercial banks, Bank of China needs to replenish its capital after massive write-offs of bad debts. It also hopes to boost its competitiveness ahead of the full opening of China's banking industry to foreign competition later this year. China recently resumed IPOs after a yearlong break for shareholding reforms. So far, the offerings have received a warm reception. Construction contractor CAMC Engineering Co., the first company allowed to conduct an IPO after the moratorium ended, saw its share price more than quadruple on June 19, its first day of trading. Shenzhen Stock Exchange officials reportedly launched an investigation after the shares fell by their 10 percent daily limit in several successive trading sessions.

Performance of subsequent IPOs has been more moderate. Last week, Shenzhen Coship Electronics Co.'s shares more than doubled from their IPO price and Yunnan Salt & Chemical Industry Co., the next in line, netted a 75 percent gain on the first day of trading. People learned a lesson from the CAMC case, so they're likely to be more cautious about the Bank of China. Bank of China reported last week that its net profit rose 31 percent in 2005 to 27.5 billion yuan (US$3.4 billion)over the previous year.