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Asia-PacificMay 2 2004

Banking alliances

In recent years, foreign banks have made many alliances with and investments in their Chinese counterparts.
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HSBC, Citibank, Hang Seng Bank, Citic Ka Wah Bank, as well as international aid donors such as the Asian Development Bank and the International Finance Corporation of the World Bank, have acquired minor stakes in mainland financial institutions, most of which are local banks.

Lately, such courtship has cooled down. Foreign bankers interviewed said that while they are still interested in making such investments, there is now no urgency to do so.

“We will make an investment in a Chinese bank sooner rather than later, but we won’t rush into it,” says Martin Fish, chief executive of Standard Chartered Bank in China.

His bank, which has just sold its 0.4% stake in the Bank of China (BoC) in Hong Kong for $86m, is said to be interested in investing in the Bank of Communications, the fifth largest Chinese bank.

As a gesture of goodwill, Standard Chartered subscribed 45.4 million shares of BoC for about $50m in July 2002, when the Chinese bank was floated in Hong Kong.

Citibank has been quiet about its next acquisition plan. In December 2002, it bought 4.62% of Shanghai Pudong Development Bank for $72m.

“We are very pleased with our Chinese partner,” says Richard Stanley, Citibank’s country officer in China, adding that there are no immediate plans for similar investments. Citibank has an option to increase its stake eventually in this ninth largest bank of China to 24.9%.

“The fact that we do not own stakes in them [Chinese financial institutions] does not mean that we are not doing business with them. We do, for example, have very large corresponding banking business with most of the large Chinese banks. And we will be growing our business organically as well.” He reveals, though, that Citibank will soon have a life insurance joint venture with a Chinese firm.

HSBC has been the most active in pursuing Chinese financial institutions. In December 2001, it paid $62.6m for 8% of the Bank of Shanghai, a young bank with an extensive network in the city of Shanghai. In October 2002, it acquired 10% of Ping An Insurance, the country’s second-largest insurer, for $600m.

In December 2003, HSBC paid $20m to buy half of a small joint-venture bank, Fujian Asia Bank, in the coastal province of Fujian. The bank has since been renamed Ping An Bank, after its major shareholder, Ping An Insurance, and HSBC’s share has been diluted to 27%.

Even an enthusiast such as HSBC is slowing down its acquisition pace. There are few obvious targets remaining, as the better ones in terms of pricing, business franchise and management have gone.

It is also increasingly expensive to buy Chinese banks. The Hong Kong-based Hang Seng Bank, a member of the HSBC group, paid $205m for 15.98% of Industrial Bank, or 1.5 times the latter’s book value.

Another concern is that foreign investors have limited control over their investment, as they can only have up to 25% of a Chinese financial institution.

Still, foreign banks will be obliged to subscribe in shares of two Chinese banks scheduled for flotation soon, the Bank of China group and the China Construction Bank. For political reasons, they will need to demonstrate their support to these Chinese state banks, even if such investments do not pay off commercially.

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Read more about:  Asia-Pacific , China