Financial Services Talking Points | 19/01/2017

 

finance-tpIn today’s talking points: ICBC signs US$8 billion deals to convert unpaid loans into equity shares; Accelerated IPO process reduces profits to investors; Growth of Direct Overseas Investment in Non-financial Sectors Hits Eight-Year High; Rational overseas M&A is called as slowdown looms.


ICBC signs US$8 billion deals to convert unpaid loans into equity shares 

China’s largest bank ICBC has signed the deals with seven debtor companies to convert US$8 billion worth of unpaid loans into equity shares. ICBC announced the deals to underscore its contribution to the government’s debt-to-equity swap initiative launched last year.

The government’s debt-to-equity initiative will give indebted companies some breathing room to improve their finances while also helping banks limit potential losses. It involves banks and other creditors to buy the new equity shares through subsidiaries, as banks are not legally permitted to hold equity in non-financial institutions.

The ICBC subsidiary holds equity shares in companies focusing on coal mining, machine manufacturing and steel and cement production. ICBC did not reveal how much debt had been converted for the equity shares.

The combined corporate and government GDP-debt ratio has reached 240%, a level that exceeds the International Monetary Fund’s global average of 225%. The GDP-debt ratio is thus “significantly higher in China than in countries at a similar level of development,” the IMF said in a recent report.

Read more at: Caixin.

Accelerated IPO process reduces profits to investors

Profits in China’s initial public offerings (IPOs) have shrunk recently, mainly due to the accelerated IPO approval process. Since 2014 the pricing of IPO shares has followed a rule set by the China Securities Regulatory Commission (CSRC) that new listings be valued at no more than 23 times their earnings. This figure while appearing very high is actually less than half the average valuation for most industries.

It was not uncommon to see prices of new IPO shares jump by the daily 10% regulatory limit for more than a dozen days in a row. However, recently listed companies floating on the Shanghai stock exchange have seen only three or four consecutive days of share price increases at the 10% daily limit.

The gains from IPO stocks have plummeted, mainly due to the increased amount of companies going public, due to the accelerated approval process. The CSRC have appeared to start shortening the processing time for companies seeking to list on domestic stock exchanges in an attempt to reduce the 600-long waiting list of applicants and begin a reform of IPO procedures.

Data from Wind, a financial information provider, showed in July there were 27 companies approved by the CSRC to launch. The prices of new shares reached up to seven times their initial IPO price following weeks of price jumps. In December, when 51 companies were approved, the stock prices only increased three times the initial IPO price.

Read more at: Caixin.

Growth of Direct Overseas Investment in Non-financial Sectors Hits Eight-Year High

China’s direct overseas investment in non-financial sectors in 2106 grew at its fastest rate since 2008. Total outbound direct investment (ODI) soared more than 40% in the non-financial sectors to $170.1 billion, according to a statement by the Ministry of Commerce.

ODI in China has continued to increase since 2002, where China urged companies to “go out” to acquire new technology to power the country’s economic growth. In 2014 ODI exceeded the foreign direct investment China received for the first time.

The ministry said Chinese investors spent $107.2 billion on 742 merger and acquisition deals in 2016, double the amount in 2015. Nearly half of the merger and acquisition deals came in the manufacturing and information industries, as Chinese companies seek to upgrade on the value chain.

Read more at: Caixin.

Rational overseas M&A is called as slowdown looms

Due to tight capital controls and rising western protectionism, China’s outbound investments shall be much healthier, according to business leaders at the World Economic Forum in Davos, Switzerland.

Overseas acquisitions have continued to hit new records with $107.2 billion on 742 outbound M&A last year, which more than doubled that in 2015. The prudent overseas investment is called and the top consideration is to improve the buyer’s competitiveness, rather than simply price. Economic and social outcomes of overseas projects should be paid more attention to and good communication with local stakeholders, not just the government shall be kept.

Read more at Caixin.