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As Liu Yonghao sits sipping his tea in the lobby of Beijing's Continental Grand Hotel, he reflects on his rise from penniless pig-feed salesman to billionaire banker. ``It took me 10 years to get a loan,'' says Liu, 52, recalling his efforts to persuade China's state-owned banks to lend to a small businessman in impoverished Sichuan province. ``And even then, all I could borrow was 1,000 yuan,'' or $120.
That was in 1985. Eleven years later, having built China's biggest agribusiness company, Liu cofounded China Minsheng Banking Corp., the nation's largest private bank.
Liu, who owns 12 percent of Minsheng, will soon test his bank's appeal with foreign investors. Sometime in the next few months, the Beijing-based bank plans to attempt to sell $1 billion of shares in Hong Kong. Underwritten by Citigroup Inc. (C), Deutsche Bank AG (DBK) and Goldman Sachs Group Inc., the sale of 20 percent of the bank's stock is the first international listing of a mainland banking franchise.
Liu Yang, a managing director at London-based Atlantis Investment Management, says she likes the Minsheng story.
``Of course I will buy their shares,'' says Hong Kong-based Liu, who helps manage $1.2 billion. ``Minsheng has made fewer bad loans and appears more nimble than its larger rivals. There are very few opportunities like this.''
Mark Mobius, Singapore-based managing director of Templeton Asset Management Ltd.'s $9 billion in emerging-market funds, won't be one of the buyers.
He estimates a $1 billion sale price equates to four times the bank's book value, which he says is excessive.
``There's this general wild atmosphere that's developing for Chinese IPOs,'' says Mobius. ``I may be missing something, but it doesn't make sense to me.''
Liu cites two reasons for his bank investment. One, he says, was to start a business-friendly bank willing to help future generations of entrepreneurs get the loans that for so long eluded him. The second was the prospect of big profits for himself.
``The financial sector is opening up,'' he says. ``It's a huge opportunity.''
Minsheng's mainland initial public offering on the Shanghai Stock Exchange in December 2000 was the hottest of the year in what was then the world's second-best-performing market.
It raised 4.1 billion yuan from a sale that attracted almost 100 times more orders than there were shares on offer.
In 2003, Minsheng's stock was the best performer among the five publicly traded mainland Chinese banks. Its shares rose 34 percent to 9.45 yuan from 7.07 yuan compared with an 11 percent rise in the benchmark Shanghai A-Share Stock Price Index.
By comparison, shares in Shanghai Pudong Development Bank (600000) Co., in which Citigroup acquired a 5 percent stake in 2003, rose only 6.5 percent to 10.53 yuan from 9.86 yuan.
Minsheng's profit in the quarter ended in September rose by 81 percent to 416 million yuan from 230 million yuan in the year- earlier period. In all of 2002, it made a profit of 884 million yuan -- a 45 percent increase over the previous year.
On Jan. 6, Minsheng made a statement to the stock exchange that its annual profit in 2003 had probably risen by at least another 50 percent.
China's big four state-owned banks -- Industrial & Commercial Bank of China, Bank of China, China Construction Bank and Agricultural Bank of China -- control assets of $1.7 trillion and account for 70 percent of all lending.
By comparison, Minsheng has only $42 billion in assets, and it has fewer than 200 outlets.
Minsheng does stand out in a banking system awash with bad debt; its nonperforming loans amount to only 1.52 percent of total loans, according to Minsheng Chairman Jing Shuping.
China's central bank, the People's Bank of China, says bad loans racked up by the big four banks average 16.9 percent of their total loan portfolios, and Standard & Poor's, in its 2004 China Financial Services Outlook, says the true figure is probably more than double that.
China's big banks became swamped in debt because from 1949 to 1998, the government had forced them to lend to insolvent state-owned enterprises that had no chance of repaying.
Minsheng, founded in 1996, faced no such requirements, says J. Thomas Macy, 68, Washington-based former chairman of world financial services practices at Price Waterhouse LLP, which audited Minsheng's accounts in 1996 and 1997.
``With Minsheng, you are getting a much healthier bank,'' Macy says.
In 2002, more than half of Minsheng's $882 million in revenue came from loans to small and medium-size private companies, from the Chinese units of large foreign companies such as Coca-Cola Co. (KO) and McDonald's Corp. (MCD) and from profitable state- owned enterprises such as Hong Kong-listed PetroChina Co., the largest Chinese oil company.
Minsheng wins business by providing better customer service than its larger rivals, says Hua Hongying, an assistant manager at Beijing McDonald's Food Co.
``It's more flexible and more willing to accommodate what we need,'' Hua says.
Minsheng earns 15 percent of its revenue from mortgage loans and other consumer banking services such as debit cards and automated teller machines, and Liu says the bank plans to introduce its first credit card this year.
``Our goal is to become a Citibank or an HSBC one day,'' says Jing, 85, whom Liu and other shareholders appointed Minsheng's chairman in 1996.
Minsheng has already attracted one foreign investor. International Finance Corp., the private lending arm of the World Bank, last year paid $23.5 million to acquire 1.6 percent of Minsheng.
Tim Krause, Hong Kong-based manager of financial institutions at IFC, says Minsheng's ability to keep its bad loans so low and its willingness to have its accounts audited according to standards laid down by the London-based International Accounting Standards Board are setting an example for other Chinese banks.
Under the terms of China's 2001 accession to the World Trade Organization, foreign banks such as Citigroup, the world's largest financial services company, will be allowed unrestricted access to the Chinese market by 2006.
China's leaders have repeatedly said they want the state- owned banks refinanced, in part through overseas share sales, to meet that challenge.
Two of China's big four -- Bank of China and China Construction Bank -- have already announced plans to sell shares abroad within the next two years, and in January, the two banks said the government had given them $45 billion from the nation's foreign reserves to shore up their books.
Bank of China, which in 2002 raised $2.67 billion by selling shares in its Hong Kong unit, BOC Hong Kong Holdings Ltd. (2388), says it will list its mainland business by 2005.
Xinhua, China's official news agency, reported on Jan. 11 that China Construction Bank plans to sell $6 billion of shares in Hong Kong before the end of this year.
``Minsheng shows other Chinese banks that if they do the right thing, they can achieve an international listing, too,'' Krause says. ``It's one thing simply to have good reform policies. It's another to have a test case.''
Foreign banks and institutional investors are watching Chinese financial stocks because, they say, profits will soar as a newly affluent Chinese middle class borrows to buy homes and cars.
China's economy has grown at an average of 9.2 percent a year for the past decade, according to Bloomberg data. Its 1.3 billion people have $1.3 trillion in savings, the central bank reported on Nov. 30.
In December, China Life Insurance Co. raised $3 billion in 2003's largest IPO. The sale -- underwritten by China International Capital Corp., Credit Suisse First Boston, Citigroup and Deutsche Bank -- attracted more than $80 billion of orders.
On the first day of trading in New York, the price of American depositary receipts surged 27 percent to $23.72 from an offer price of $18.67.
``If Minsheng can get it out fast while the market's still hot, I'm sure they can sell it,'' says Carl Walter, J.P. Morgan Chase & Co.'s chief operating officer for greater China.
Minsheng is only just coming onto the ratings firms' radar. Moody's Investors Service hasn't yet issued a rating.
S&P in 2003 gave Minsheng a so-called public information local currency rating of B. That means it has assessed Minsheng on all of the financial information publicly available and has not yet conducted its customary in-depth interviews with management.
Minsheng's B rating is lower than the BB+ foreign currency rating for Bank of China, China Construction Bank and Industrial & Commercial Bank of China (601398) and the BB public information rating for Agricultural Bank of China.
S&P, in its 2004 China Financial Services Outlook report, says the state-owned banks rate that high only because they have implicit government support. Because of their bad loans, the report says, they would otherwise be technically insolvent.
Terry Chan, Melbourne, Australia-based director of financial services ratings at S&P, says he believes Minsheng has reported its low level of bad loans correctly. He says that it might be too early to say how accurate the 1.52 percent figure will prove to be.
That's because Minsheng is such a new bank and is growing so quickly that many of its loans are relatively recent, which means that borrowers can more easily meet their repayments.
``At this stage, the nonperforming-loan ratio alone may not fully reflect the asset quality,'' says Chan. ``To get a clearer picture, we need to see some seasoning of these loans.''
Chan says he's also concerned about the amount Minsheng sets aside for possible loan losses. In September, its so-called capital adequacy rate -- a measure of financial strength that expresses a bank's capital as a percentage of its risk-weighted assets -- was 7.1 percent, according to Chairman Jing.
The Basel, Switzerland-based Bank for International Settlements recommends an 8 percent rate for banks in industrialized countries. Jing says the Hong Kong share sale will enable the bank to achieve the 8 percent ratio.
Jim Stent, 57, a U.S.-born former Bank of Asia Pcl vice president who in 2003 was appointed one of Minsheng's four independent directors, says he can identify other shortcomings.
`Interesting for Investors'
``They need to improve on their marketing, branding and customer services, but that's what makes it interesting for investors,'' he says. ``If we were already up there, where's the opportunity?''
Minsheng is growing so quickly it has been forced to find a new home. Until now, Jing and his team have operated in a 93-year- old, five-story building on tree-lined Zhengyi Street in Beijing's old diplomatic quarter.
In March, Minsheng is scheduled to move to a new, 12-story headquarters in the city's Xidan financial district, opposite the 10-story, I.M. Pei-designed Bank of China.
That's a long way from Liu Yonghao's rural roots in Xinjin, a village 2,000 kilometers (1,243 miles) southwest of Beijing in Sichuan province.
The son of a local official and a schoolteacher and the youngest of four brothers, Liu says he didn't get his first pair of shoes until he was 20, ate meat only once a month and drank milk twice a year when he was sick.
Today, he still speaks Mandarin Chinese with a distinct Sichuan accent and shuns designer clothes in favor of plain blue suits, white shirts and monochrome ties. ``My needs are very basic,'' he says. ``I don't need branded goods to be comfortable.''
After working as a farm laborer and an instructor at the provincial government's industrial machinery bureau, Liu in 1979 won a place at Sichuan Broadcast and Television University, graduating in 1982.
While he attended college, he and his three brothers -- Yongyan, 58, Yongxing, 55, and Yongmei, 54 -- were casting around for a business opportunity.
At that time, many Chinese were battling to feed themselves, even in Sichuan -- a largely rural province of 100 million that, according to government statistics, boasts as many hogs as humans. ``We decided to go into a business that would help fill people's stomachs,'' Liu says.
When China's then paramount leader, Deng Xiaoping, allowed small agricultural companies to be formed, Liu and his brothers sold their bicycles and watches to raise seed capital and in 1982 started manufacturing animal feed and selling it to farmers.
They named their company Hope Group, and their slogan was ``One kilo of Hope feed makes your pig grow by two.''
After state-owned Agricultural Bank of China -- China's fourth-biggest bank, with bad loans of 30 percent in 2002 -- finally provided 1,000 yuan, the Liu brothers were on their way.
They began buying up bankrupt state-owned agricultural enterprises and turning them around. By 1995, Hope Group was ranked No. 1 on a government list of the 100 largest private companies in China.
By then, Liu had also become a leading figure in the government-linked All China Federation of Industry and Commerce. After entrepreneurs complained they were being discriminated against by banks, Liu and others went to see the federation's chairman, Jing Shuping.
``We wanted a bank by private companies for private companies,'' Liu says.
After meeting with Liu in 1993, Jing approached China's then- deputy premier, Zhu Rongji.
``We needed a bank to serve small and medium-sized enterprises,'' Jing says. ``So I asked Zhu, `Why not set one up as a pilot plan -- a bank that will be a commercial bank not only in name but in fact?' Zhu approved it.''
Minsheng Bank -- Minsheng means born of the people -- opened in 1996.
One of Liu and Jing's first decisions was to ask Price Waterhouse (now PricewaterhouseCoopers) to be the bank's auditors, making Minsheng the first Chinese bank to use an international accounting firm, says former auditor Macy, who after his retirement served as an adviser to Jing.
Back then, Minsheng had two branches, in Beijing and Shanghai; 100 employees; and $170 million of capital from Liu and the 58 other original investors. Today, it has 192 outlets, 5,000 people on staff and a market value of $5 billion.
While he was working on Minsheng, Liu was expanding his agricultural business. Most of the Liu family companies are closely held.
Liu's stakes in Minsheng Bank (valued at $600 million) and in one other China-listed company, Sichuan New Hope Agribusiness Co. ($180 million), indicate his holdings are worth at least $1 billion, making him one of China's richest men.
In 1999, Liu and his company, renamed New Hope Group after the brothers split the business's divisions between them and went their separate ways, linked up for the first time with IFC to set up Chengdu Huarong Chemical Co. to make fertilizer in Sichuan.
Liu took a 41 percent stake, and IFC paid $3.2 million for 25 percent.
``They are a very good group, and Liu is one of China's leading entrepreneurs,'' says IFC's Krause. ``He does things in a responsible way. He recognizes he does not know everything, and he is prepared to leverage his understanding with that of outside people.''
Krause cites Jing as an example. Jing grew up in Shanghai, the son of wealthy parents. He ran the family real estate company in the 1930s and later took over a cigar factory.
He emerged from the Japanese wartime occupation of the city and the subsequent civil war with his company intact; then, in 1956, he was ordered to Beijing by Mao Zedong to become one of the so-called red capitalists running the industry federation.
During the Cultural Revolution of the 1960s, he was banished for two years to work as a farm laborer before being recalled to Beijing by Deng Xiaoping.
``Jing's a very compelling character,'' says Krause. ``He has offered very strong leadership at Minsheng and a deep understanding of the market. When it comes to lending, he knows who can be trusted and who can't.'' Liu says the bank's success is due to both China's boom and the bank's risk management and transparency.
All loans have to be approved by a committee of independent directors led by Zhang Ke, managing partner of Xinyong Zhonge Accounting, China's largest accounting firm.
Even Jing and his president, Dong Wenbiao, 46, cannot authorize loans without the committee's consent.
Four independent directors sit on the 16-member Minsheng board, including Princeton University-educated Stent, who has worked in Asia for 30 years and is also a director of Bank of Asia, a Thai lender that is 80 percent owned by ABN Amro Holding NV.
``In terms of transparency and disclosure, Minsheng is a trailblazer in China,'' says Nicholas Lardy, a senior fellow at the Washington-based Institute for International Economics who specializes in Chinese banking.
Lardy says that, while he's impressed by Minsheng's performance compared with its rivals, he's not sure how independent of government the bank really is.
Like all state-controlled companies and some private ones, Minsheng has its own Communist Party committee, and Dong and a vice president, Hong Qi, 46, also act as the committee's secretary and vice secretary.
``Who appoints the chairman and CEO? Is it the board of directors or the party?'' Lardy asks. ``Can the directors really kick out the chief executive if he's doing a crap job?''
Liu, who's not a party member, says the directors call the shots. ``If there's a political aspect, it's escaped me,'' says Stent, a fluent speaker of Chinese. ``At board meetings, the independent directors are outspoken and active in discussions, and our comments seem to be well taken.''
That, Lardy says, makes Minsheng more independent than China's other financial institutions. The big four banks remain 100 percent government owned.
Below them is a second tier of 11 so-called joint stock banks, in which ownership is distributed between various central, provincial and city government bodies and private investors. Of those banks, Minsheng is the only one in which private investors are in the majority.
Because of the big four's ownership structure and their high bad-debt levels, foreign lenders seeking to test the Chinese market have been choosing to buy minority stakes in the joint stock banks.
In 2001, HSBC Holdings Plc paid $63 million for an 8 percent share of unlisted Bank of Shanghai, which has $20 billion in assets -- half that of Minsheng -- and 200 branches.
In 2003, Citigroup paid $72.5 million for its 5 percent of Shanghai Pudong.
In December, HSBC's Hong Kong subsidiary, Hang Seng Bank Ltd. (11), paid $208 million for a 16 percent stake in unlisted Industrial Bank Co., based in the southern province of Fujian.
Jing says that Minsheng also wants a foreign bank to buy a strategic stake. Last year, the government relaxed its restriction on foreign ownership by a single investor to 20 percent from 15 percent.
`No Shortage of Suitors'
``Minsheng has had no shortage of suitors,'' says IFC's Krause. Jing says any deal doesn't hinge just on money; the operating and marketing skills a foreign bank could offer are equally important, he says.
Meantime, Jing has been hiring the best talent he can find, much of it young and Western educated.
One example, Stent says, is company secretary Mao Xiaofeng, 30, former president of the All-China Students Federation and an official of the Communist Youth League, who joined the bank last year after completing a Master of Public Administration degree at Harvard University's John F. Kennedy School of Government.
``Our average age is under 30,'' Mao says. ``We are led by a legend of China, Mr. Jing. The rest are talented, young and passionate.''
Minsheng is going to need all of that passion as it faces increasing competition from domestic as well as foreign competitors.
Five years ago, the government spent $33 billion to bail out the big four banks. A year later, it set up four asset management companies to acquire $170 billion of debt.
This past January's $45 billion payment to Bank of China and China Construction Bank represented 1/10 of the nation's foreign reserves.
Jing says Minsheng is meeting the challenge to be posed by domestic banks and foreign banks post-2006 by building up its consumer lending.
In 2002, Minsheng wrote $360 million worth of mortgages. Last year, the figure was $2.4 billion.
Customers, mostly aged 25-42, borrow $36,000-$120,000 to buy apartments.
Minsheng is also increasing the installation of ATMs and the issuance of debit cards. Last year, the Chinese government relaxed restrictions on the interest rate banks could charge, previously confined to a range of 4.7-5.31 percent. Now banks can charge up to 1.7 times the 5.31 percent benchmark.
`Price Risk Properly'
``This will help Minsheng price business risk properly,'' Stent says.
Ultimately, Minsheng's fortunes hinge on China's ability to enrich its 1.3 billion citizens.
``The Chinese economy today is like a pyramid, with a very small high-and-middle-income group at the top,'' says Jing. ``But it will eventually become the shape of an American football with a bulging middle class. And that middle is where our potential lies.''
When the bank offers its shares to the public in the next few months, investors around the world will decide whether that potential is worth betting on.