BEIJING -- Despite the sizzle and pop of a huge bank IPO, shares in Hong Kong broadly declined on Thursday, losing 1.3% to 15,645. The Shanghai Composite Index rose 2.6% to 1684.

In New York trading Wednesday, China plays gained along with major indices.

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Bank of China, one of the nation's four leading state-owned banks, staged a giant $9.7 billion market debut in Hong Kong Wednesday, gaining 15% in its first day of trading. The shares, priced near the top of the offering range last week at HK$2.95, closed at HK$3.40. Underwriters were BOC International, Goldman Sachs, and UBS.

The hearty welcome came despite weeks' worth of selling in the broader Hang Seng Index, which represents the 33 leading companies traded in Hong Kong. Since May 8 the Hang Seng has fallen 9.6%, beset by the prospect of further interest rate hikes in the U.S. and worries that equity gains in broader emerging markets can't be sustained.

But investors in Hong Kong, especially those in the retail camp, were having none of the gloom and doom. "It's mainland China and IPO fever," said one banking analyst there who declined to give his name. He added the level of interest in Bank of China "wasn't really surprising. Everyone's taking a ride on it." Just last week a major Chinese port operator, Tianjin Port Development, popped 26% in its Hong Kong IPO.

Last fall's China Construction Bank IPO, which was the first of China's Big 4 banks to go public, was a stomping success, raising $9.2 billion.

Industrial and Commercial Bank of China the third member of the group, reportedly plans to list in Hong Kong and possibly New York or London.

The two financial IPOs so far mark a milestone in Beijing's ongoing efforts to revamp China's financial institutions, long viewed as a weak link in the country's economic transformation.

That process was kick-started in 2003, when authorities injected $45 billion into Bank of China and China Construction Bank -- the poster children for banking reform -- and introduced better corporate governance and risk management policies.

But both banks still struggle with both a legacy of corruption and a highly fragmented network of branches stretching across China's vast geography.

The state continues to maintain a huge role in their business: Beijing will continue to own a 70.5% equity interest in the Bank of China even after the IPO, down from 79.9% before.

Too, Bank of China and China Construction would be highly vulnerable in the event of a broader economic downturn, since banks account for almost all corporate financing in China (where only an estimated 2% of financing comes from the bond and equity markets).

"If the economy starts to slow down significantly we're probably going to see significant asset quality problems. Credit risk management systems, while very much improved, are still fairly rudimentary," said Peter Tebbutt, director at Fitch Ratings in Hong Kong.

Last year 12.7% of Bank of China's loans were classified as "special mention" loans, a term referring to customers whose business operations are weak or who have had problems making payments in the past. But that figure was an improvement from 19.8% the year before.

With 2005 assets of RMB 4.7 trillion, Bank of China is the smallest of the nation's four leading banks, according to Ryan Tsang, director of financial services ratings at Standard & Poor's. "But that's not really a bad spot, considering how big the market is," he added. BOC, along with reform-minded counterparts Industrial & Commercial Bank, China Construction and Bank of Communications, stand to reap substantial rewards in China with moves into higher-margin consumer businesses like residential mortgages and wealth management.

Members of this group "have an advantage over some of their smaller competitors in terms of distribution networks, brand recognition and confidence on the part of depositors," said Tsang. "So in that sense it will be easier for them to expand into consumer businesses where reputation counts."

While Chinese banks have been upgrading operations and management, foreign strategic investors have scurried to line up partners in the Middle Kingdom, hoping to secure a piece of the rewards for themselves.

In 2005 acquisition-hungry investors poured some $12 billion into the financial services sector in China, especially the state-owned commercial banks preparing for IPOs, according to PricewaterhouseCoopers.

For its part, Bank of China won a $3.1 billion investment last August from a group including Royal Bank of Scotland, Merrill Lynch and Hong Kong magnate Li Ka-shing, who were collectively awarded a 10% stake in the bank.