Beijing’s best banks are snapping up emerging market lenders left, right and centre, and have long coveted access to developed markets in Europe and North America. So why are they nowhere to be seen?
In truth, many Chinese lenders see the credit crunch-cum-catastrophe as reason to err on the side of caution, rather than to seize undervalued foreign banking assets. A few Sino-foreign deals have been signed in recent months. In May 2007, Beijing’s newly formed sovereign wealth fund, China Investment Corp, bought a 10% stake in US buyout group Blackstone. Two months later, Barclays sold a 2.64% stake to China Development Bank, the country’s leading policy lender. CIC ended the year by cutting a much larger deal, buying 9.9% of troubled Morgan Stanley for $5 billion.
But CIC will feel that it hasn’t come out well from many of those deals. Sources close to the fund say the government was irked at buying stock in Blackstone before its initial public offering, only for the firm’s stock to sink quickly below its issue price. The stake in Morgan Stanley – seen as a better long-term bet by the Beijing government – has also proved, in the short term, a bit of a stinker.
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CIC is understood to have turned John Mack down when he sought additional investment in Morgan Stanley |
That’s why, sources say, CIC was less than keen to increase its stake in Morgan Stanley when the head of the US investment bank, John Mack, came cap in hand in September this year looking for a further bailout. "There’s a huge amount of uncertainty in China as to how much any [western] bank is worth at the moment," says a Beijing-based banker. "The [Communist] Party doesn’t like unnecessary bets, and Morgan Stanley falls into that category." There are also dissenting voices in the Politburo, China’s cabinet, which dislike state funds – the "people’s money" – being thrown at failing foreign corporates in search of a quick capital fix.
"In for a penny, in for a pound" might have been a better approach for CIC. Mitsubishi UFJ Financial clearly thought so. After CIC passed on the Morgan deal, the Japanese megabank moved in quickly in September, buying 20% of the US brokerage for about $8.5 billion. The deal guaranteed MUFJ at least one seat on Morgan Stanley’s executive board.
China’s softly-softly approach does make sense, though. Before allowing its leading corporates to buy foreign assets, China’s leaders like to know exactly what they are buying. And right now no one, not even US Treasury secretary Hank Paulson, can honestly say how long it will take before US lenders are free from the taint of sub-prime debt.
"China knows that it’s a good time to buy foreign banking assets but they want to understand the nature of the bad assets first," says Ha Jiming, chief economist at Beijing-based China International Capital Corp. "In reality, it’s impossible to do due diligence on these assets, as no one knows how much more shit there is still out there."
Giving the knife a further twist, Ha notes that even China’s legacy of non-performing loans – usually in the form of government-directed lending between leading mainland banks and leading state-owned enterprises is nothing compared with the current financial crisis.
"In China we don’t have these bad products like [collateralized debt obligations] – we only have bad loans to SOEs, and they are pretty easy to understand and analyse these days," he says. "In America’s banking system, it’s hard to work out if anything is worth anything any more." Dissenting voices in Beijing have also warned against allowing Chinese lenders to buy US counterparts for fear of any deal being scuppered by a protectionist US Senate. That has happened before, notably the high-profile $18.5 billion failure of oil company CNOOC to buy US rival Unocal in 2005.
For now, China’s leading banks will continue to acquire well-positioned lenders in emerging markets. Recent deals include the October 2007 purchase of 20% of South Africa’s Standard Bank by Industrial and Commercial Bank of China, for $5.6 billion cash. In June 2008, China Merchants Bank, the country’s best-run lender, bought a 53% and controlling stake in Hong Kong-listed Wing Lung Bank for $4.7 billion.
It should also be noted that China’s banks, unlike their Japanese counterparts, are still largely underdeveloped financial institutions. Even the country’s largest brokerage, Citic Securities, does not have a licence to trade debt or equities in the US – or any other overseas market. "If a Chinese bank did acquire a foreign bank – say, if it had acquired Lehman Brothers – it would not have known what to do with it," says Gene Ma, chief economist at Beijing-based independent research firm CEB Monitor. "This is not like buying a copper mine, which is a pretty simple process. Chinese banks would be forced to learn from the bottom up, and that’s probably not what anyone wants at the moment."