SHANGHAI, July 15 (Reuters) – Agricultural Bank of China’s (601288.SS) record $22 billion IPO made a lacklustre debut in Shanghai, underscoring the challenges ahead for China’s markets as other big banks look to tap investors for billions of dollars.

AgBank’s listing completes its transformation from technical insolvency to a sprawling giant with assets of close to $1.4 trillion as of March and a customer base of 320 million, larger than the population of the United States.

However, it comes against the less-than-ideal backdrop of a stock market that has been the world’s second-worst performer this year after Greece, questions over economic growth and rival banks returning to capital markets to supplement their coffers after a state-decreed lending spree last year.

“There’s a lot profit-taking pressure from investors, who are not optimistic about the long-term prospects of China’s economy or the banking sector,” said Liu Jun, analyst at Changjiang Securities in Wuhan.

“The debut reflects worries over slower growth and rising bad loans at Chinese lenders, and continued weakness in the stock may prompt a renewed slump in the overall market.”

AgBank shares were up 0.8 percent to 2.70 yuan ($0.40) in afternoon trade, versus its IPO price of 2.68 yuan.

Analysts surveyed by Reuters had expected the stock to gain about 5 percent or less. The Hong Kong shares (1288.HK) list on Friday and are seen making similarly modest gains.

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For TAKE A LOOK on AgBank [ID:nSGE65307X]

StarMine comparative data r.reuters.com/jan46m

FACTBOX on China's AgBank [ID:nTOE65308J]

Graphic comparing China banks:

link.reuters.com/vah95m

For Reuters Insider clip on China capital raisings:

link.reuters.com/heh67m

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LOW KEY APPROACH

AgBank, which is aiming to raise a record $22 billion after exercising an overallotment option, took a low-key approach to its listing, not opening the debut ceremony to foreign media.

Chairman Xiang Junbo, a former soldier and scriptwriter, marked the occasion by giving a crystal model of AgBank’s Beijing headquarters to the head of the Shanghai Stock Exchange, who gave Xiang a bronze opening gong in return, live television pictures showed.

Investors around the country watched the debut of the last of China’s “Big Four” lenders to go public closely, looking for signs of whether the beleaguered stock market might find relief after shedding about a fourth of its value so far this year, in part because of jitters over the massive AgBank offering.

At one brokerage in downtown Shanghai, individual investors, many of them retirees, swapped theories on how much the government was controlling the stock market while watching with disappointment as AgBank’s share price failed to take off.

“Apparently, investors think the AgBank IPO was overvalued, and the only reason it isn’t falling is that it’s a political task to keep it above the IPO price,” said Qiu Zhicheng, an analyst at Guosen Securities Co in Shanghai. “This is not good for other banks’ fundraisings going forward.”

However, some retail investors looked to AgBank’s modest day-one performance as a positive sign for the long run.

“A debut like this means the stock price will soon choose a direction, and I think it’s more likely to rise,” said Tony Shu, a lawyer who bought 20,000 shares, worth around $8,000, in the IPO. “I won’t sell AgBank until it reaches 3 yuan, which I think is very possible,” he said.

The lacklustre debut for China’s third-largest bank by assets weighed on other banking stocks, despite encouraging economic data that showed inflation stayed in check in June. The main stock index .SSEC fell 0.3 percent in afternoon trade. [ID:nTOE66D06L] [.SS]

AgBank has about a 5 percent weighting in the index, putting it neck-and-neck with China Construction Bank (CCB) (601939.SS) as the index’s third-biggest component.

A weak performance in its first days of trade could bode ill for upcoming fundraisings by peers including Industrial & Commercial Bank of China (ICBC) (0349.HK)(601398.SS) and Bank of China (3988.HK)(601988.SS), who are returning to capital markets to raise tens of billions of dollars to supplement their capital.

The “Big Four” will have a market capitalisation of roughly $680 billion if AgBank exercises its overallotment options, more than Turkey’s gross domestic product last year.

FUNDRAISINGS IN FOCUS

AgBank’s debut achieved a much smaller price gain than its rival banks, whose shares jumped up to one-third in their first day of trading in Shanghai. After exercising its over-allotment, ICBC raised $21.9 billion in its October 2006 listing, which stands as the world largest IPO to date.

AgBank, founded by Mao Zedong in 1951 and which now has some 441,000 employees in more than 23,000 branches, has said it would grow at a faster pace than its major rivals, reporting on Tuesday a 40 percent jump in first-half net profit.

The bank which was technically insolvent just three years ago and had non-performing loans of around 24 percent. It sold 22.2 billion yuan-denominated shares in Shanghai at the top of an indicated range, while the Hong Kong deal priced in the middle of its original range.

It is expected to pay a total of $248 million in fees to the firms that handled its IPO, the lowest underwriting payout of any of the Big Four.

AgBank sold 40 percent of the Shanghai offering to 27 strategic investors including China Life Insurance (2628.HK) (601628.SS) and China State Construction (601668.SS). They are subject to lock-up periods of 12-18 months.

Eleven cornerstone investors have been selected for its Hong Kong share offering, including Qatar Investment Authority and Kuwait Investment Authority, taking a combined $5.45 billion worth of shares. ($1=6.77 Yuan)