“As close as lips and teeth”
This expression has long been a favourite of Chinese diplomats, deployed to describe an interdependent fraternity with neighbouring countries that goes well beyond normal diplomacy. Never mind that this oral doctrine failed to deliver with Vietnam and North Korea in the past.
Now Pakistan is the latest nation to be chewed over by Beijing, thanks to the so-called China-Pakistan Economic Corridor (CPEC), a $62 billion infrastructural makeover that is largely inspired and financed by China and that represents a key plank in Chinese president Xi Jinping’s $1 trillion-plus Belt and Road Initiative.
Pakistan’s gushing president Mamnoon Hussain returned the compliments at a recent Lunar New Year function in Islamabad, even deploying the lips-and-teeth metaphor back at the Chinese.
Karachi’s bankers would like all this love to turn into profitable business; they are salivating at the prospect of a portion of the CPEC pie, and hope it won’t just be Beijing’s own bankers who are licking their lips.
Pakistan’s biggest bank, HBL, has positioned itself well ahead of its Pakistani rivals to get set in CPEC. It has set up a China coverage team by hiring a posse of Chinese bankers in Pakistan and putting local bankers into Mandarin classes. HBL’s 15-strong team is spread between the head office in Karachi and regional offices in Islamabad and Lahore.
HBL has also set up a branch in the western Chinese city of Urumqi, the only foreign bank in Xinjiang province (which borders Pakistan) and the only Pakistani bank with a functioning branch in China. Other banks are trying to build on what are so far not much more than token efforts.
Karachi's bankers hope the river of renminbi flowing south will generate rupees for their banks
But it may all be for precious little. Bankers in the commercial capital, Karachi, are reminded of what they are up against each time they drive home from their towers on the city’s Wall Street, Chundrigar Road, to their villas in suburban Clifton.
Towering over Clifton is one of the city’s tallest buildings: Ocean Tower or, as it is becoming increasingly known, ICBC Tower, adorned with the logo of the world’s biggest bank, the Industrial and Commercial Bank of China.
ICBC isn’t the only Chinese bank operating in Pakistan. Bank of China’s office was opened last year by no less a dignitary than president Hussain, who urged BoC to multiply its branch network across his land and even pledged support from the State Bank of Pakistan – perhaps forgetting that it was not his pledge to make on behalf of the notionally independent central bank.
All along Chundrigar Road, there’s talk that the Chinese will buy a Pakistani bank. The two most often mentioned are Faysal Bank, with its 300-strong branch network, and the Islamic bank Meezan, with 600 branches.
Meezan took over HSBC’s Pakistani business in 2015. Now Kuwait’s Noor Financial, the biggest shareholder, is believed to have engaged Credit Suisse to find a buyer for its 49% stake, estimated to be worth about $500 million.
As a UBL executive says: “Either [bank] would be chump change for the Chinese.”
But do the Chinese actually want or need to buy a Pakistani bank?
Much of the CPEC infrastructure is being built by Chinese firms and financed by Chinese banks.
Saad Hashemy, of Karachi research house Topline Securities, calculates Pakistani banks have funded just $474 million of the $7 billion-worth of CPEC projects now under way.
“Given that most CPEC projects are directly funded from China, local banks have not had any major flows,” he says.
But if China does buy a Pakistani bank, it would mark a big shift in strategy by Beijing, which has so far financed its forays abroad from home. It would also transform the Pakistani financial sector.
As HBL’s head of corporate and investment banking, Farhan Talib, puts it: “Either their banks will come and compete with us, or they’ll buy a local player and we compete with them.”
Bankers recall how China Mobile, the world’s biggest telco, made its mark in Pakistan. In 2005, it bid to buy Islamabad’s state-owned telco PTCL, but lost out to the over-paying Etisalat of the UAE. Two years later it launched Zong, which quickly became Pakistan’s third-largest mobile operator, sprinting past Etisalat-PTCL.
For the moment, however, Karachi’s bankers are standing by as China’s teeth lock onto official lips in Islamabad. They hope that this river of renminbi flowing south will at least generate rupees for their banks.
“To me, it doesn’t matter,” says HBL’s Talib. “If they are intent on being in this market, we’ll just have one more player to play with.”
As China’s influence spreads across Asia, so will its financial institutions. Bankers across the region would do well to look, learn and prepare, using what is happening in Karachi today as an example.