The unexpected stock market plunge early in 2008 caught the Chinese investors on the wrong foot. What's worse, Ping An Insurance's (SH. 601318, HK. 2318) plan to raise 160 billion yuan ($22.22 billion) infuriated both institutional and private investors, dragging the market down further as it suffered the biggest weekly loss in a decade.

On the night of January 20, Ping An Insurance announced that its board of directors had approved a plan to raise capital in the mainland A-share market. Ping An said it would issue 1.2 billion new shares as well as up to 41.2 billion yuan ($5.72 billion) in convertible bonds attached with warrants in what would be China's largest and one of the world's biggest fund-raising plans. It was reported that the money raised would be used for Ping An's overseas acquisitions.

Previously, the two largest A-share market fund raisings were PetroChina's 66.8 billion yuan ($9.28 billion) and Shenhua Energy's 66.58 billion yuan ($9.25 bilion). But Ping An's new plan would probably surpass the aggregate amount of the two--equivalent to creating a new Ping An in the A-share market.

The announcement triggered the stock market to plummet further. In 10 trading days from January 21 to February 1, the benchmark Shanghai Composite Index dropped to 4320.77 points from 5188.79 points, down 17 percent, causing fears of a bearish market.

"If there was no such announcement, the market would not have suffered so heavily," said Sun Peng, analyst with CITIC's China Securities Research. "The large-scale capital re-raising brought enormous influence on the stock market, causing panic selling and hitting hard at the investor confidence." Sun said that unless there were better measures to save the market, the future of the market could be in jeopardy."

A devastating sum

Ping An Insurance, the first joint-stock insurance company in China, is also the fastest developing one. In April last year, the company ranked 36 among 114 insurers of the Forbes Global 2000. It also ranked the first among all Chinese non-state enterprises on the Forbes list.

Open data from Ping An showed that it raised 32.2 billion yuan ($4.47 billion), excluding distribution fees, in its mainland initial public offering (IPO) in March last year. The money was in turn used to invest in the company's capital fund. By the middle of last year, the actual capital fund had reached 7.345 billion yuan ($1.02 billion), double what it was at the end of 2006. Meanwhile, Ping An's net profits grew 104.4 percent in the first half of 2007 year on year. Therefore, the new financing effort was not meant to bring more money into the capital fund, but to carry out Ping An's overseas expansion ambitions.

Investors criticized Ping An's extraordinary financing plan. Wu Xiaoqiu, financial professor of Renmin University, blamed Ping An publicly, arguing that the multi-billion financing "was irrational, crazy and hard to understand."

Ping An's announcement said the money raised would be used to enrich the capital fund of the company, as well as invest in investment projects approved by relative departments.

Industry insiders question the latter purpose. Li Yang, a Beijing securities analyst, contended that Ping An was "a mature company, and the multi-billion dollar financing plan must be backed by some government departments." Li said any financing plans raised by big industry giants must seek permission from the government.

Some suspected Ping An would use the money to acquire banks. Just before the announcement of Ping An's financing plan, China Insurance Regulatory Commission (CIRC) had agreed insurers could invest in convertible bonds with attached warrants and allowed insurers to expand their investments in the overseas market. Sun Jianyong, a senior official with CIRC, said the U.S. subprime mortgage crisis had actually created opportunities for the domestic insurance industry, which could make good use of the opportunity to invest and carry out acquisitions in global market.

Currently, the market values of Citibank and HSBC, which were hit hard by the subprime mortgage crisis, are not high. Their earnings per share and price to book value ratio were just one third of Bank of China and the Industrial and Commercial Bank of China, and were more worthy of investment.

Essence Securities estimated that Ping An could use the money raised to fully control an international financial institution with market value of around $30 billion, or control a company worth $60 billion.

However, Wang Xiaogang, an analyst with Oriental Securities, said it was very likely that Ping An would purchase a domestic bank, and it was a needed step in Ping An's expansion. Wang said it was less likely that Ping An would control a major financial institution.

A Beijing Review reporter contacted Sheng Ruisheng, spokesman for Ping An, but he did not give a specific answer about how the money would be used. Sheng only said the company was holding meetings to discuss details of the financing plan, and the company would give a definite answer to the market after the shareholder meeting in March this year.

Drastic reaction

The market responded angrily to Ping An's plan. By February 1, the price of Ping An in mainland A-share market dropped to 73.99 yuan ($10.27) from the peak of 149.28 yuan ($20.73), and its market value shrank by half. Li Yang said it was totally predictable because there was heavy pressure in terms of money invested in the market. At the same time, the expectation that non-tradable shares would be made tradable in the market also posed heavy mental pressure on investors. Li said Ping An's financing plan was confronted with serious challenges.

Many securities companies complained about the sudden notice of Ping An's plan, and blamed Ping An for not considering the actual situation of the fledgling A-share market. The sharp drop in Ping An's share price showed their anger over the plan.

Wang Yaozhu, researcher with Nanjing Securities, said Ping An's purpose was questionable and the company did not explain why it only chose to raise money in the mainland market instead of the Hong Kong market.

Tao Zheng'ao, analyst with Donghai Securities, said he did not see why Ping An needed to raise so much money and that it was hard to estimate the returns from the money raised. Tao said the losses suffered by international financial giants showed the importance of risk control. Tao suggested Ping An keep cautious of the outward risks.

Still, some securities companies held a positive view about the future development of Ping An. As a subsidiary of Ping An of China, Ping An Securities quickly commented on the financing plan. Its chief financial researcher Shao Ziqin stated that the new financing plan would push Ping An to become an internationally competitive company. In the long run, "Ping An's management team is the best in China and is the most internationalized," Shao said. "We expect Ping An's performance will be good in the future."

Li Yang said even if the money raised was to be invested in overseas acquisitions, the attempt was too risky under the current climate.

Ping An's businesses contain insurance, banking, securities, trust, fund management, health insurance and pensions, though these have developed unevenly. Ping An's profit mainly comes from the insurance side. The combined profits from banking, trusts and securities accounted for less than 1 percent of total profits. Ping An has planned to set up a financial system focused on insurance and banking in five years, but currently there is a gap between the dream and the reality.

Professor Wu Xiaoqiu said that Chinese companies have always been in a rush and wanted to accomplish everything overnight. This heedless ambition could eventually damage investor confidence and the company, he said. "Once investors lose confidence in the market and the listed companies, it will be hard to repair," said Wu.