Agricultural Bank of China's $22 billion IPO made a lackluster debut in Shanghai, underscoring the challenges ahead for China's markets as other big banks look to tap investors for billions of dollars in funds.

AgBank's listing caps years of planning and preparation, completing its transformation from technical insolvency to a sprawling giant with assets of around $1.2 trillion and a customer base of 320 million -- larger than the population of the United States.

However, it comes against a less-than-ideal backdrop of a weak stock market, questions over economic growth and rival banks returning to capital markets to supplement their coffers after a state-decreed lending spree last year.

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.

AgBank shares were up 0.8 percent to 2.70 yuan ($0.40) by mid-day on Thursday, versus its IPO price of 2.68 yuan.

Analysts surveyed by Reuters had expected the stock to gain about 5 percent to 2.81 yuan or less. The Hong Kong shares list on Friday and are seen making similarly modest gains.

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 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.

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.

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 in the IPO.

I won't sell AgBank until it reaches 3 yuan, which I think is very possible, he said.

The lackluster 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 fell by 0.4 percent in morning trade.

AgBank has a 5.3 percent weighting in the index, making it the 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) and Bank of China, who are returning to capital markets to raise tens of billions of dollars to supplement their capital.

FUNDRAISINGS IN FOCUS

The debut bucked the typical trend, registering a much smaller price gain than its rival banks, whose shares jumped up to one-third in their first day of trading in Shanghai.

ICBC shares rose 5 percent on its first day of trading in Shanghai in October 2006, compared with 23 percent for Bank of China also in 2006 and 32 percent for China Construction Bank (CCB) in 2007. After exercising its over-allotment, ICBC raised $21.9 billion, which stands as the world largest IPO to date.

AgBank, chaired by former soldier and scriptwriter Xiang Junbo, was founded by Mao Zedong in 1951 and now has some 441,000 employees in more than 23,000 branches.

Investors have cast doubt over Chinese banks' growth prospects after last year's lending spree weakened their balance sheets and threatened asset quality.

AgBank 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.

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

AgBank has sold 40 percent of the Shanghai offering to 27 strategic investors including China Life Insurance and China State Construction. 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.

China China Construction Bank