China succeeded in launching the biggest IPO in history when it took its Industrial & Commercial Bank of China (ICBC) public this week. The deal raised over $21 billion from investors eager to get in on the opportunity. The motivation behind their eagerness? It's not just credit ratings and economic growth. This time it may be cyclists, canoeists and a big flaming torch.

The ICBC was a state-owned bank suffering from the country's infamous diseases of bad debts and corruption. Like the rest of the banking industry in China, which for decades was cloaked under the mysterious protection and opaqueness of other state-run enterprises in the country, this institution has only recently begun to build an infrastructure that can withstand economic realities.

As recent as two years ago, 20% of ICBC'sloans were non-performing. Fake mortgages were rampant, and loans to government entities were made at far from arm's-length interest rates.

Despite all these red flags, investors are still keen on getting a share of this bank because they think the government has extra motivation to make sure things run smoothly before the upcoming 2008 Olympics. A banking crisis would severely sour the media surrounding the games, so if for nothing else than a PR initiative, the government would probably smooth any worries with capital injections or other tools to get them through their moment in the spotlight.

In addition, all the building and clean-up activities planned as part of the country's preparation to host the 2008 Games have led economists to forecast 10 percent annual growth until the torches are lit.

But what happens when all the medals have been donned, the stadium lights dimmed, and the souvenir t-shirt vendors departed? The loans extended by ICBC go well beyond 2008. What extaordinary motivation will the government have to guarantee bad debt then?

Posted by Michelle Smith on October 27, 2006 07:20 AM