The fact that this listing did not occur on an American or London stock exchange, something that just four years ago would have been arguably unheard-of has tremendous implications for the world economy as a whole by shifting the future of flow of funds and investments away from US dollar or British pound denominated investments into Yuan and Hong Kong Dollar denominated investments.  In the past, particularly during the technology boom in the <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />US, investors were tripping over themselves to get an opportunity to participate in the rally in the stock market as well as the plethora of IPO listings.  This time around, China is the one to benefit.  Foreign investment has increased significantly over the past few years.  The ICBC IPO listing will be too attractive for most foreign investors to ignore the leaders on Wall Street have already snapped up a piece  of the pie.  <?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

Cleaning Up the Books

Reforms to liberalize markets and improved transparency have paid off well for China, soothing previously wary investors and allowing the ICBC offering to be as large as is projected. Importantly, not only does a commitment to cleaner business practices make Hong Kong a more attractive place to invest, but it also pushes China itself towards the path of reform.  Having to adhere to disclosure rules and other regulations as a part of the listing process requires a greater deal of conformity to Western standards on the part of Chinese firms. This is a necessity if they want to attract big capital and the exchanges will most likely be extremely careful with reviewing the financial statements of the banks to ensure that one mistake does not reverse their entire efforts to make the Chinese financial markets a respectable rival to Western nations.  China will be using the proceeds from the IPO to continue to address the countrys concern with non-performing loans. 

The Big Banks are Already There

Last April, Goldman Sachs, Allianz, and American Express paid a combined sum of US$3.8 billion for 8.45 percent of ICBC.  Their investments are now worth up to US$9.5 billion. Goldman Sachs is not underwriting the deal, but will probably gain the most. The firm invested $2.6 billion in ICBC and will probably see the value of its investment double over the next few months.  The same is true for Allianz and American Express.  Merrill Lynch, Credit Suisse Group, Deutsche Bank AG and China International Capital Corp are all underwriters on the deal.  Large customers of those foreign banks will probably be one of the firsts to get the opportunity to participate in the deal.  Expect money to flow out of those countries into Shanghai and Hong Kong.  The Chinese Yuan continues to appreciate on the expectation that the IPO will generate significant capital flows.  It has now appreciated 2.5 percent since the currency was revalued to 8.11 on July 21, 2005.  One year onshore Yuan forwards are anticipating an additional 3.1 percent rise in the Yuan in one years time.

US Dollar Ramifications

The United States now finds itself at an important crossroad. It famously runs a trade deficit, importing more goods than it exports. This puts considerable downward pressure on the US dollar. The deficit has not been as problematic in the past because the US was able to remain attractive as an investment destination. As long as foreigners continued to pump more money into the purchase of US financial assets than was leaving as a result of trade, Americans could continue splurging on foreign goods without the gap becoming too much of a burden for the US dollar. However the funding of the deficit is becoming a growing risk.  If the IPO listing occurred in the US, investors would need to buy dollars to participate, but this is not the case.  Instead, investors will be buying the Hong Kong dollar and Chinese Yuan.  Interestingly enough, the US may be comfortable with this since they have been looking for more appreciation in those currencies for some time, but for the US dollar, this is certainly not a positive development.  It is also not a trend that is likely to reverse.