Agricultural Bank of China Ltd.'s valuation discount to its closest rivals has more than halved in eight trading days, making the world's biggest initial public offering in almost four years less appealing to investors.

Shares in the Hong Kong part of Agricultural Bank's IPO are valued at an average 4.3 percent less than its three biggest competitors as measured by book value, based on the top end of the IPO price range and data compiled by Bloomberg. When the bank priced the offering on June 24, the gap was 10.5 percent.

The narrowing discount, the result of a drop in shares of publicly traded rivals such as Industrial & Commercial Bank of China Ltd., may make it harder for Chairman Xiang Junbo to raise the maximum $20.1 billion he's seeking in Hong Kong and Shanghai. It might also dim the prospect of eclipsing ICBC's record $21.9 billion IPO in October 2006, even when taking into account an option to boost the sale by 15 percent.

David Fuller's view Any technical analyst will tell you that in the short to medium term, the market is all about supply and demand. Supply, in the form of large IPOs, has weighed on China's stock market for the last year. In a command economy institutional investors cannot sit on their hands if they do not like an IPO for one of the government's banks, so they have to raise cash for the additional purchase, which siphons money away from other shares.

Why is the government offering all these shares and what might happen if the Hong Kong portion of this float does poorly in the H-Shares market where the government has considerably less political influence over prospective buyers?

Colleague Jackson Wong of Investors Intelligence, who produced the Global Leaders report posted last week, told me that China's government is worried about bad debts due to property speculation gone wrong, so it wants to ensure that the banks have sufficient capital in hand to deal with nonperforming loans. This makes sense to me.

My observation over four-and-a-half decades is that spectacularly successful IPOs, where share prices race higher following the sale, are usually the sign of a developing bubble and therefore a contrary indicator for the market, albeit of uncertain timing. I first saw this with Howard Hughes' sale of TWA in 1966, near what proved to be the peak of a secular bull market. By far the best comparatively recent example was the dotcom IPO mania in 1999 and early 2000, shortly before one of the biggest bubbles in history burst. Too much supply, not to mention supply of dubious merit in the tech instance, kills off the bull-run.

Conversely, when IPOs flop this is generally seen as very bearish, except for contrarian thinkers who have seen it before. Poor results from IPOs deter additional public offerings, reducing the overhang of supply which investors had been fearing.

I am not saying that the Agricultural Bank's IPO will flop in the A-Shares market. China's command economy should deliver the buyers. However if the IPO clearly does worse in the H-Shares market, I would regard it as a favourable medium-term signal for China's stock market.