Tickers in this Article: CHL, MS, GS, YGE, FXI, EWH, FXP
Reading about all of the angst and concern about the IPO of the Agricultural Bank of China, I am reminded that waiting for the hammer to fall can be worse than the blow itself. A lot of market-watchers have made this event into an be-all/end-all referendum on the state of China's market. The truth, though, is that the long-term impacts are all but certain to be far less earth-shaking.

A Big Deal, But ...
There is no doubt that the IPO of AgBank is a major event. This is the last major bank in China to go public, it is a very significant lender in the country (particularly in rural areas), and the performance of the stock is going to tell us all something about the appetite for Chinese shares. It is also true that you do not see a $23 billion IPO very often. (For more, see IPO Basics Tutorial.)

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The "but" is that it is simply one stock in a growing market, and it happens to be a stock in a sector that has driven investors batty around the globe for the past couple of years. In other words, I think it is entirely possible that a less-than-completely-perfect IPO for AgBank may just have a little something more to do with the problems and inefficiencies of the Chinese banking sector and this bank's increasing non-performing loans than a general referendum on the markets as a whole.

... Does It Really Change Anything?
Consider the following argument: If the AgBank IPO sputters, how does that reduce the demand for telecom services that China Mobile (NYSE:CHL) provides? How does it slow the flow of Chinese internet users to Baidu's (Nasdaq:BIDU) sites? Does it mean that PetroChina (NYSE:PTR) sells less oil, or that Yingle (NYSE:YGE) sells fewer solar panels?

Again, I am not trying to suggest that the AgBank IPO is not an important event and something of a short-term bellwether. After all, the financial news was filled with reports on Tuesday morning of the "disappointment" that AgBank's underwriters priced the offering with expected proceeds of $23 billion instead of the prior hope and expectation of closer to $30 billion. Certainly that is a big deal for underwriters like Goldman Sachs (NYSE:GS) and Morgan Stanley (NYSE: MS), and investors like Archer Daniels Midland (NYSE:ADM).

A Signal Of Sorts
Likewise, this deal does give a sense of the immediate appetite of Chinese investors for their own shares. It does not seem unreasonable, for instance, to think that some of the recent downward pressure in Chinese shares has come as a result of portfolio managers making room for these shares. Similarly, it is not unreasonable to extrapolate that if Chinese investors do not support this IPO, it is a sign that economic and market conditions in China may be softer than believed and U.S. investors should stay on the sideline. (For more, see Investing In China.)

But here is the rub - it is a signal with only limited time value. In my time as a sell-side analyst, I heard a lot of strange reasons to like and dislike stocks, but I do not remember a fund manager telling me that he was not going to buy a stock today because there was a disappointing IPO a month ago, especially if it was in a completely different sector. So maybe a cool reception to this IPO means that you should wait another month or two to invest in China, but it is not going to matter much after that.

Bottom Line
Retail investors in the U.S. are not going to be able to play this IPO, so I am not going to worry about those details. If you have a strong interest in ETFs like Xinhua China 25 Index (NYSE:FXI), MSCI Hong Kong Index Fund (NYSE:EWH) or the double-levered ProShares Ultra China 25 Index (NYSE:XPP) and UltraShort China 25 Index (NYSE:FXP), proceed with caution. I would be very nervous making long-term bets against China, but I also would not rush into a levered investment in a country seemingly holding its breath on a large IPO for a less-than-perfect bank. (For related reading, check out Top 6 Factors That Drive Investment In China.)

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