I read in today’s Australian that Kerry Stokes 7 Media network has subscribed to buy up to $250 million dollars of shares in the Agricultural Bank of China in their upcoming IPO. Strategists will be able to comment on the strategic wisdom of a media/tractor business buying shares in a Chinese bank (!) but for 7 shareholders they might want to know a little more about ABC. ABC was one of the four big banks created after China’s reform process began in 1979, and in the case of ABC the objective was to support rural sector state owned enterprises (SOEs). In the case of all of the big four, the objective in the 1980s and early 1990s was to support reform efforts and economic development, rather than to pursue commercial objectives. With these objectives it is not surprising that NPL rates were very high. In the late 1990s it was decided to clean these banks up so that they could operate along more commercial lines, which in the case of ICBC, BOC and CCB (the other 3 of the big 4 banks) meant that after some recapitalisations and carving out of some NPLs into asset management companies these banks could successfully IPO in recent years. The problem for ABC was that its loans in the rural sector are very important for rural development. The government could not afford to have ABC operating on commercial lines if they wanted to support “harmonious development” and so the high NPLs at ABC were accepted. In terms of the level of NPLs the official estimates from around 2005 were in the order of 30% – a senior executive in an Australian bank’s China operations told me at that time that he thought that ABCs NPLs were probably closer to 70%! Either way even with interest rates being regulated in China you have to have pretty hefty margins to make money in that world. I’m sure that the big subscribers in the ABC IPO have done their due diligence, but it would worry me that ABC still has the majority of its loans to SOEs, and is therefore very heavily exposed to any slowdown in China’s countryside. But if you have any more questions on ABC, don’t ask me, ask Kerry Stokes.