The pay-off from his venture into China is far from assured. Global investors increasingly have doubts about the future of Chinese banks, which in 2009 and last year went on a 17.6 trillion yuan ($3.49 trillion) lending spree, according to People's Bank of China data.
Fitch Ratings estimated in a report issued in April that as much as 30 per cent of all loans in China's banking system - about US$3 trillion-worth - could become non-performing.
Hedge-fund manager Jim Chanos - who achieved fame by forecasting Enron's downfall - told Bloomberg News in September that he was shorting Agricultural Bank and other Chinese lenders, betting on a fall in their share prices. China was on "a bigger and faster treadmill" than ever as property sales slowed, Chanos said last week, warning the country faces a "hard landing".
Concerns about bad loans have affected Agricultural Bank, too, even though it is benefiting from increasing investment in western and central China. Its shares had lost 17 per cent of their value since the IPO as of October 10 but jumped once Central Huijin Investment, a unit of China's sovereign wealth fund, began buying the stock.
"Industry is moving west and money is flowing into those areas - no question," says Singapore-based Mark Mobius, who manages US$50 billion and is executive director of Templeton Asset Management's emerging-markets group. "But in one fell swoop, bad loans can wipe out any profits you make."
The economic health of China - and its banks - is increasingly important as the world teeters on the brink of another financial crisis.
China has accounted for more than 40 per cent of global growth since 2008, Bloomberg data shows. It holds 31 per cent of all foreign reserves. Of the world's seven biggest banks by market capitalisation, four are Chinese. Agricultural Bank, with a market value of US$123 billion, ranks No3 in China, behind Industrial & Commercial Bank of China and China Construction Bank, and vies for fourth in the world with America's Wells Fargo and JPMorgan Chase & Co.
After three decades of searing growth that has averaged 10 per cent a year, the country as a whole will grow at 8 or 9 per cent in the second half of this year and next year, says Qu Hongbin, Hong Kong-based chief economist for China at HSBC Holdings. Investors polled in a Bloomberg survey in September said that by 2016 they expected China to grow at "only" 5 per cent annually - half the current rate.
But the inland areas where Agricultural Bank is the largest lender are the exception, with growth of more than 10 per cent, Qu says.
Agricultural Bank takes in 22 per cent of all deposits and makes 14 per cent of all loans in the counties and other subdivisions of China's provinces that account for 70 per cent of the population and 49 per cent of gross domestic product, says Warren Blight, a banking analyst at Keefe Bruyette & Woods, a New York-based investment bank that specialises in financial companies. And with loans amounting to just 55.5 per cent of deposits, Agricultural Bank has plenty of money to lend.
"Agricultural Bank is a proxy for China's new growth engine: rural China," says Lewis Wan, Hong Kong-based chief investment officer at Pride Investments Group, which manages US$200 million of China assets.
Qu says that trend will continue as the Government of Premier Wen Jiabao pumps money into central and western regions, where the poorest 700 million of China's 1.3 billion people live. The most notable examples of this spending are on roads and railways funded largely by a US$585 billion stimulus package announced in 2008 to fight the impact of the global economic crisis.
About 3700km of new railways have been built in the west - double the figure for eastern China, Qu says. Four-fifths of the 400,000km of new highways were also built in inland regions.
In the first eight months of this year, so-called fixed-asset investment - which includes road and rail construction plus other long-term projects such as factories, mines and real-estate development - jumped by 30 per cent in inland China compared with 23 per cent in the east, the National Bureau of Statistics reported in September.
Even the relentless migration of people from the countryside to the city is occurring at a faster rate in inland areas, which house some of the country's great urban areas, as well as the farmland that feeds the world's largest population. From 2005 to 2009, the number of urban dwellers in inland China rose by more than 4 per cent compared with a 2.7 per cent increase in the east of China, according to HSBC.
A prime example: Chongqing, a sprawling municipality of 33 million people - 1 times the size of Beijing or Shanghai. Located on the Yangtze River 1450km west of Shanghai, its GDP tripled to 793 billion yuan from 2004 to 2010 while Shanghai's merely doubled. Wuhan, a city of 8.4 million also on the Yangtze River, Chengdu, capital of the western province of Sichuan, and Chongqing have attracted investors such as Ford, Intel and Pfizer.
Founded in 1951 by Mao Zedong to finance rural co-operatives, Agricultural Bank has by far the widest reach of China's big four lenders. It has more customers - 320 million - than the United States has people. And its 23,500 branches far outnumber the 16,200 outlets operated by Industrial & Commercial Bank of China (ICBC), the world's biggest bank by market value.
While Agricultural Bank's total assets of 11.46 trillion yuan are smaller than ICBC's 14.9 trillion yuan, they're close on the heels of Bank of China, with 11.48 trillion, and Construction Bank, with 11.8 trillion.
Stokes, the Australian billionaire, says he decided to invest US$250 million in Agricultural Bank shares based on his personal experience. In 2000, he acquired the franchise to sell Caterpillar earthmovers across a swathe of rural China, from the North Korean border to the windswept prairies of Inner Mongolia. Stokes says he had never been previously tempted to invest in a Chinese bank offering.
"Our focus is in the regions and Agricultural Bank is a story we understood better than most people," he says.
Even though the stock has declined since the IPO and the lock-up period has expired, Stokes plans to hold on to his shares. He says the bank's customers are similarly loyal. "Agricultural Bank's deposit base is probably the soundest of any bank in the world," he says.
One such customer is Lai Kebin, 45, who says Agricultural Bank's backing helped him lift himself out of poverty and into China's newly wealthy class. Lai has built his fortune by exploiting the lush sugar cane fields of Guangxi autonomous region, 2000km south of Beijing.
Lai was raised in the regional capital, Nanning, a city of 6.7 million, in a family so poor that they could afford only cotton shoes for him to wear to school.
He spent his first eight years in the workforce toiling at a low-level government job before the speeches of reformist leader Deng Xiaoping inspired him to set up his own sugar firm, Yong Kai Group.
Within a year, Lai got his first loan from Agricultural Bank. Back then, the Yong Kai Group was worth 3 million yuan and employed 200 workers. Today it is one of China's top 10 sugar producers. This year, Yong Kai's revenue will top 10 billion yuan and employees will total 3000.
Like many Chinese entrepreneurs, Lai has also expanded into real estate. In the process, he and other developers have transformed Nanning, until recently a city of mostly two-storey buildings, into a high-rise metropolis of office towers and condominiums. Those residential apartments include a development called Fond England, guarded by concrete soldiers with British Army bearskin hats.
Lai credits his success to China's leaders' decision to encourage rural development as well as to the Agricultural Bank financing. "The hills, water and people are still the same," Lai says. "What has changed is government policy."
Lai says he now also borrows from other banks, including ICBC, although he still favours the lender that gave him his start. "Agricultural Bank is a bank with scale and the fact that it is inclined to agriculture business makes it an easier funding source for us," he says.
Customers such as Lai are boosting Agricultural Bank's earnings growth. In the first half of this year, profit jumped 45 per cent to 66.7 billion yuan from a year earlier, after increasing 46 per cent last year. Those gains compare with an average 30 per cent rise for its three rivals.
"We can say with pride that the Agricultural Bank has staged a wonderful dance of concerted urban-rural growth," then-chairman Xiang Junbo told investors in August. "They've all lost the battlefield of the countryside," he said of his rivals in an interview after the first-half results announcement.
The bank may have more difficulty convincing investors about the quality of its loan book. As of June 30, 1.67 per cent of Agricultural Bank's loans were non-performing. That's more than the 1 per cent for Bank of China and 0.95 per cent for ICBC. It is still reporting a lower rate than some international banks, such as HSBC Holdings, which has 2.04 per cent.
Like other Chinese banks, Agricultural Bank is exposed to local-government debt, which the national auditor this year said some authorities had obtained by offering illegal guarantees and would struggle to repay. Xiang said that financing to local authorities was under control, accounting for about 10 per cent of the bank's total lending of 5.38 trillion yuan.
Chinese banks have overstretched in the recent past, when lenders were so awash with non-performing loans as to be technically insolvent.
From 1998 to 2008, China's government had to bail out the four big banks to the tune of more than US$650 billion before they could sell shares to the public.
Agricultural Bank got 815.7 trillion yuan. Last year Agricultural Bank's three state-controlled rivals returned to the market to raise an additional US$35 billion in capital. Xiang has said Agricultural Bank won't need to ask investors for more money until at least 2013.
Still, its core capital adequacy ratio, an indicator of financial strength, fell to 9.36 per cent in the first half of this year, from 9.75 per cent at the end of last year. Sanford C Bernstein banking analyst Mike Werner says the bank may have to return to the capital markets if it is to meet the 9.5 per cent level required by 2013 under the Basel III accords.
Agricultural Bank also faces growing competition, especially from thousands of rural credit co-operatives. Foreign banks, too, are seeing opportunities in inland China. HSBC, Europe's biggest lender, has 17 rural branches. Citigroup has opened four offices it describes as rural lending companies because they don't take deposits.
So far, Agricultural Bank's biggest foreign investors are hanging on for the ride. Sovereign wealth funds, banks, public companies and individuals paid a total of US$5.45 billion as cornerstone investors. The lock-up period expired in July and, as of October 24, none of the biggest investors had sold their shares, according to Bloomberg data.
Qatar Holding bought US$2.8 billion of shares and the Kuwait Investment Authority acquired US$800 million. Singapore sovereign wealth fund Temasek Holdings invested US$200 million and Li Ka-shing invested US$100 million. Standard Chartered, the London-based bank that makes most of its profits in Asia, invested US$500 million while Dutch lender Rabobank invested US$250 million, the same as Stokes' Seven Group Holdings.
Stokes is digging deeper into the market in more ways than one. His earthmoving equipment unit, WesTrac China, has signed a deal with Xiang under which Chinese contractors buying his earthmovers, which sell for US$100,000 to US$300,000, will be able to finance the purchases with Agricultural Bank loans.
"The transformation taking place in rural China means they are moving from wheelbarrows to excavators," Stokes says. "Until now, getting finance for our customers has always been a challenge."
The loan deal is giving Stokes some return now for his ties to Agricultural Bank. As China's economic engine continues its shift toward the burgeoning hinterland, Stokes says he's willing to wait for his bank stake to pay off.
- BLOOMBERG
