US-based investment bank and financial brokerage Morgan Stanley hopes to play a major role in China Construction Bank's (CCB) overseas listing.

"It is very promising that we will become CCB's IPO (initial public offering) underwriter, given our strong partnership and years of co-operation," Wu Changgen, managing director of Morgan Stanley, said last Thursday.

Morgan Stanley and CCB - China's third-largest lender - co-established, in 1995, China's first joint venture investment bank, China International Co Ltd, which has played an active role in numerous IPOs, mergers and acquisitions in China.

Morgan Stanley and CCB also signed an agreement late last year to co-operate in the disposal of the State-owned lender's bad assets, reportedly worth 4 billion yuan (US$482 million).

"For years we have been advising CCB on issues, including risk management, internal control and other market-oriented reforms. The bank is also willing to contact us for advice on IPO-related topics," Wu said.

"But as to who will become CCB's main underwriter, it still depends on the bank's final decision, which will be made soon."

Last month, Morgan Stanley and other international players submitted bidding documents to CCB regarding the bank's overseas underwriting business.

CCB is expected to announce this week the appointments of its IPO underwriters.

The leading contenders are believed to be Morgan Stanley, Citigroup, J. P. Morgan Chase and Deutsche Bank, insiders said.

CCB's IPO will likely exceed US$5 billion and generate more than US$175 million in underwriting fees, based on a standard 3.5 per cent of the proceeds.

"Income from fees is a major consideration for foreign investment banks bidding to underwrite CCB's listing," Gao Huiqing, division chief of the State Information Centre's department of strategy and development, told China Business Weekly.

"But these international giants are seeing CCB's bid as a big opportunity to enter China's huge IPO market for commercial lenders."

China's three other largest banks - the Bank of China (BOC), Industrial and Commercial Bank of China (ICBC) and the Agricultural Bank of China (ABC) - have also outlined timetables for their overseas listings.

"Underwriters selected by CCB will have a better chance of being selected by other banks," Gao said.

The Chinese Government two weeks ago injected US$25 billion, from its foreign exchange reserves, into BOC and CCB as their capital funds.

This was widely considered a sign the government will soon give the banks approval to list.

"Once the banks' IPO timetables are set, the competition among foreign investment banks will intensify," Gao predicted.

Last year's successful IPOs of PICC Property and Casualty Company Ltd and China Life - two of China's largest insurers - have contributed to foreign investment banks' desire to underwrite CCB's listing, Gao said.

"China's financial firms are now enjoying a 'high' time on Wall Street, and this trend will continue for quite a while," Gao said.

"This will make the sale of CCB's shares much easier. Foreign investment banks clearly know this."

Citigroup and Deutsche Bank have offered to buy stakes in CCB to win the IPO underwriting deal, insiders said.

China's State-owned banks have been trying to strengthen their balance sheets to speed up their IPOs, Wu said.

CCB announced last week it had earned 51.2 billion yuan (US$6.2 billion) in profit last year, before setting aside provisions for non-performing loans (NPLs).

CCB's profit in 2003 increased 13 billion yuan (US$1.6 billion), or 33.9 per cent, compared with the previous year, while the bank's NPL ratio was reduced by 4 percentage points.

"China's State-owned banks will still have a lot of homework to do before listing their shares," Wu said.

"In the short term, the banks must enhance their internal control and management. But their long-term competitiveness will hinge on the soundness of China's credit system."

Lack of transparency in companies' accounting books and widespread business fraud are now commercial lenders' main concerns, Wu said.

The banks will likely have a hard time enhancing their asset quality if their lending decisions continue to be based on false accounting figures and distorted information about borrowers, Wu said.

Establishing a nationwide credit information system, which could be accessed by all lenders to assess credit data of potential borrowers, is a possible solution, Wu added.

Morgan Stanley is negotiating with BOC about the bank's underwriting arrangements, but "chances of winning the deal are small," Wu said.

(Business Weekly 01/20/2004 page5)