For many investors, the turn of the millennium is a bitter-sweet memory, marked by extraordinary triple-digit percentage gains in new issues of technology ventures that ultimately fell flat. But for companies that survived the era's crushing equity sell-off, such as Amazon, Yahoo!, and Akamai Technologies, the relatively short time period where investors bought anything that listed marked a unique opportunity to establish built-to-last, powerful business models with revolutionary consequences for the economy.
The same can be said of the Chinese banking system right now, even as its U.S. counterpart struggles towards recovery. Tuesday brought the first of many financial IPOs to come to China in more than two years, with China Everbright Securities' $1.6 billion Shanghai market debut.
One day after notching up a 30 percent gain however, the stock slumped 10 percent, as the Shanghai Composite Index fell into bear market territory. Although most analysts don't foresee the sell-off in equities as particularly long-lasting or affecting any other pending financial IPOs, the lesson is a good one for Everbright. While there is money swishing around, it's what you do with it to change the state of things and set yourself up for the future that counts.
Last week, I pointed out that a flood of Chinese A-share listings of foreign banks could mean an improvement in the value of mortgage-related derivatives, since the traditional Shanghai-listed equity premium would also apply to the assets a bank holds. That's one way of using short-term hot money to create longer-term solutions.
Fortunately, Everbright seems like it gets the idea. Today, the firm announced that it is forming a joint venture with Macquarie Bank in order to form two funds which will invest $1.5 billion in infrastructure projects in China. One of the funds will be open to global institutional investors, while the other will be available to Chinese citizens. Both banks will invest $100 million of their own capital in the funds.
Teaming up with Australia's Goldman Sachs equivalent to develop transportation projects and water plants is a worthy way to utilize some of the windfall gains the bank received from the recent IPO.
These types of projects are generally long-term undertakings that generate years of income. The investments are not related to Everbright's core business of underwriting stock issues and selling shares, and thus create a useful income diversification for the broker. And they have tremendous real-world affects which is to the genuine benefit of the Chinese people.
American banks, so often caught up in the latest quantitative financial gimmickry, could learn a thing or two from this worthy example of creating sustainable value.
Further Reading at BNET Finance: