China is endangered by anti-foreign flu

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Complaints about the prices of bank privatizations do nothing to further the cause of China’s continued integration into the global economy.

The Chinese are famous for taking a long view of history. It is an attribute that might be usefully applied in the recent unseemly squabbles in Beijing over the sale to foreigners of shares in state-owned banks.

After the success of China Construction Bank’s $9 billion IPO in Hong Kong, factions within Chinese government circles have accused the country’s central bank, the People’s Bank of China, and, in particular, governor Zhou Xiao Chuan, of selling shares in the big state-owned banks at knock-down prices. They point to the rapid appreciation in the share price of CCB since the IPO as evidence that foreigners have been allowed to get into China’s precious banking sector on the cheap.

The shouts have been loud enough to prompt a robust defence of the government’s strategy from governor Zhou and Liu Mingkang, the chairman of the China Banking Regulatory Commission. The complaints are also said to underlie delays in approving Singapore state investment company Temasek’s planned investment in Bank of China, as well as the $3 billion investment by a Goldman Sachs-led consortium in Industrial and Commercial Bank of China already announced. ICBC, which is planning to list in early 2006 along with BOC, also terminated discussions with Middle Eastern investors because of souring sentiment at home.

Such ill-conceived arguments do nothing to further the cause of China’s continued integration into the global economy. Those accusing the authorities of selling state assets on the cheap neatly overlook the wood while staring at the trees. Although it is true that strategic investors in CCB acquired their shares at 1.2 times book value compared with the IPO price of 1.9 times and post-IPO valuations of as high as 2.7 times book, part of the price appreciation is a result of their very presence on the share register.

The investments must also be viewed in the context of the overall restructuring of China’s banking system. Little more than three years ago, China’s entire state banking sector was a basket case: why else did the government feel compelled to pump in almost $50 billion to recapitalize the key state banks? Even with the fresh capital, NPLs remain high by Asian banking standards and risk management controls and corporate governance standards are, at best, works in progress. The reform of China’s state banking system is the largest privatization of its kind. Little wonder then that when China’s regulators went looking for strategic investors, something they know is mission critical to a successful listing of each of the banks, they have discovered that foreign investors can drive a hard bargain too.

It is testament to a worrying level of dissent within party circles that Zhou and Liu are facing such domestic criticism, and bodes ill for foreign investment in so-called strategic mainland Chinese assets. International investors in Korea were welcomed with open arms when capital was needed and vilified when they made profits commensurate with the risks they, rather than domestic investors, were prepared to take. It would be a great shame and a real threat to China’s commendable progress thus far in reforming its entire financial system if China contracted a similar strain of anti-foreign flu.