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Dr. P.V. Viswanath |
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Foreign investment in China's banks |
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Billion-dollar gamble Another of China's big banks finds illustrious foreign partners THREE out of four ain't bad. On August 30th it emerged that China's biggest lender, Industrial and Commercial Bank of China (ICBC), had secured $3 billion in investment from two American financial institutions, Goldman Sachs and American Express, and Allianz, a big German insurer. The three will take a combined 10% stake in the state-owned bank. The three biggest of China's four main state-owned banks have now found foreign backers. In June Bank of America (BofA) invested $3.1 billion in China Construction Bank (CCB); in July Temasek, Singapore's state investor, put in $1 billion. Last month Royal Bank of Scotland (RBS), Merrill Lynch and Li Ka-shing, a Hong Kong tycoon, bought 10% of China's second-biggest lender, Bank of China (BoC), which on August 31st said it would offload another 10% to Temasek for $3.1 billion. Temasek also promised to spend another $500m on BoC shares at flotation. All three banks are now on course for listings on foreign stock exchanges: CCB will probably go this year, BoC in the spring of 2006 and ICBC in 2007. For the banks and their regulator, the wooing and winning of such attractive international partners is a triumph. Only two years ago, China's banking industry was burdened by colossal bad loans, understood little about credit risk and had a bureaucratic, antiquated culture. To spruce themselves up for listing, the banks have been selling off their old non-performing loans: they even put their bad-loan ratios in single digits, although the true figures are probably still much higher. Their capital has been bolstered by $60 billion of state money, a quarter of it handed to ICBC in April. And they are hard at work restructuring, shedding jobs and modernising their management. BoC plans to fire and rehire the best of 230,000 people in 11,000 branches and has “tried and penalised” at least 50,000 workers for fraud. The lenders naturally hope to profit from the expertise of their new foreign friends. BoC has already sent its top managers abroad to learn how real banks work. Now their teachers are coming to them. It is harder to see what the foreigners stand to gain. The investment banks will be hoping to share in the underwriting of the flotations, though fees of a few tens of millions of dollars will hardly recoup their outlay. Commercial banks such as RBS and BofA want to tap the Chinese banks' vast retail clientele. They have joint-venture agreements to offer credit cards, mortgages, insurance policies and investment products to middle-class Chinese. There is certainly an appetite for all these, but it is hard to see them making a profit for years yet. There is also a growing risk that consumer loans will go bad, as China's experiment with car lending has shown. It may also be that the Chinese banks will simply want to learn the tricks of the trade from their western partners before freezing them out. There are precious few stories of harmonious Sino-western commercial ventures in China. With stakes of only 5-10%, none of the foreign investors will be able to exercise any control when it matters. Even HSBC, an old China hand, which in 2004 paid a fairly modest $1.7 billion for 19.9% of Bank of Communications, China's fifth-biggest lender, has only two board seats and barely a dozen people on the ground after months of co-operation. Nor, despite due diligence, do the foreigners really know how clean their partners' books are. Bank scandals in China are numerous: witness the removal in March of CCB's chairman for taking bribes. At least RBS has covered itself: it will get some of its cash back if BoC discovers big problems. It seems that investors in ICBC, at least, have agreed something similar. For the foreign investors, a lot depends on the stockmarket listings. If the flotations go well, the foreigners will make a decent return and can then wait for their longer-term plans to bear fruit. If not, their foray into China might look much less smart. It is hardly reassuring that so much should hang on a stockmarket gamble. |
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