Deep in the heart of Colombo, one of Asia’s more pleasing and genteel capital cities, there is a portal into the future. You can find it on the first floor of 40 York Street, one of Sri Lanka’s oldest thoroughfares, in a dusky red brick building once owned by Cargills, a local conglomerate.
It isn't much to look at. Inside the lobby is a small plastic tree decorated with silver baubles and blue tinsel. The star on the top is bent, and a sign on the front wishes all-comers Happy Christmas, even though it is well into January. The offices beyond smell chemically clean, like a new car.
Then a young woman appears, motions to a meeting room, and presents a business card introducing herself as Patricia Liu, head of business development for Bank of China (BoC) in Sri Lanka. Others join the meeting; they sit, staring intently and expectantly.
Introductions are made and the new-car smell is mentioned. Have the offices been recently decorated?
“This is a heritage-protected building, and we needed to do a lot of renovations, which we faithfully observed,” Liu replies. “We got our full banking licence in 2018, on March 12, and we had our opening ceremony on March 28. Bank of China started banking operations in September 2018, and within three months we were profitable.”
This is important because, here in south Asia’s friendliest and most open country, Bank of China is a lender in a hurry. It wants to be a local power player and is leaving nothing to chance. The opening ceremony was attended by luminaries including the prime minister, Ranil Wickremesinghe, according to one attendee.
“Even by Sri Lankan standards, it was a lavish affair. The food was extremely good,” says the chief executive of a rival lender, who believes he got invited to the event by mistake.
It’s put to Liu that any bank willing to stump up $80 million in paid-in capital, just to be allowed to open a single full-service branch, must have big plans in that market.
She nods. “Our head office [in Beijing] expects us to be the leading foreign bank here within five years. And certainly by 2025. By then, we will be the number one foreign bank in terms of assets and loans and deposits.”
That’s a bold claim. BoC may be China’s oldest and probably its most outward-looking commercial lender, with 88 branches in 30 countries (excluding its extensive business in Hong Kong). But locally, at least, it is starting from a very low base. Its main target from the outset, the bank says, will be “the corporate banking segment, starting with Chinese corporates operating in Sri Lanka”.
It has no securities licence in Sri Lanka and says it has “no immediate plans” to offer investment banking services. Liu says it has chosen in the near term not to focus on retail “due to [internal] limitations”.
Compare that with HSBC, which is strong in credit cards and premium banking, and is more often than not the go-to financial partner of choice for multinationals and foreign institutional investors. Or Deutsche Bank, which also specializes in financing and hedging oil imports. Citi and Standard Chartered are strong too, as they are around the region.
Those four lenders collectively accounted for 4% of customer deposits, 5% of gross loans and 7% of total assets in the third quarter 2018, according to published results.
Our head office expects us to be the leading foreign bank here within five years. And certainly by 2025. By then, we will be the number one foreign bank in terms of assets and loans and deposits- Patricia Liu, Bank of China
But BoC clearly believes that accelerating trade between China and Sri Lanka will be enough to put it on top of the pile within a few years. Most of its business is guided by the local needs of big mainland companies, and that is unlikely to change.
Liu says the bank has three goals in the domestic market: “First, to target the Chinese enterprises that work here. Second, to be a bridge between China and the local market, which is the heart of our strategy. And third, to serve local firms doing business in China.”
After being relocated from Bank of China’s Manila office in 2018, Liu says her biggest surprise was finding so many Chinese enterprises here.
“There are maybe 70 mainland companies, most of them state-owned and involved in infrastructure and construction,” she says. “Chinese firms are [typically] investors, builders and contractors. When we speak to them, they really believe this market has huge potential for them.”
That makes sense. Sri Lanka’s economy isn’t the region’s largest, but it embraces foreign capital, is safe to live in, and has long been a good friend to China.
The two largest and most important onshore infrastructure projects are the expansion of Hambantota Port in the south and a new financial hub, Port City, taking shape on reclaimed land in Colombo. The former is overseen by China Harbour Engineering and the latter by its parent, China Communications Construction. Both projects are funded by Beijing’s twin development lenders, China Development Bank (CDB) and Export-Import Bank of China (Exim).
Port City, while still in its infancy, could transform Sri Lanka into a regional financial hub, one with stronger links to China than to the West. Hambantota, an expanding logistics and industrial hub now in effect owned by Beijing, offers a visual narrative of all that is both good and bad about China’s Belt and Road Initiative. But how important are the two projects for Bank of China?
“Those two investments were a milestone,” Liu unhesitatingly replies. “At first, China Harbour was financially supported by Chinese development banks like CDB and Exim, who have also worked with the Sri Lankan government. They are the link.”
But as the projects mature, the state firms that drive them will look around for lenders able to provide everyday banking services: payroll accounts, cash management, trade finance, foreign exchange and so on.
At that point, Bank of China will, she says, become “the first-choice financial partner for mainland firms. Over the past year, several projects have already been funded through us. Since opening last year, we have been asked to provide a term loan facility for one Chinese contractor, and we are currently assessing whether to fund 10 other projects. In time, Hambantota will become a big industrial area.”
The bank says it is preparing to disburse grant facilities to mainland firms working in the logistics and industrial zone abutting the port.
A clearer picture of the future starts to emerge. Bank of China’s sole local branch might not at first glance look like a harbinger of things to come. BoC does not intend, at least in the near term, to market itself as a potential banking partner for non-Chinese foreign firms investing in Sri Lanka. Nor will it target the likes of Brandix Group or MAS Holdings, textile firms whose supply chains are intertwined with big North American and European retailers.
In Sri Lanka, Bank of China is still finding its feet and its focus. Its offices, all unscuffed blue carpeting and whitewashed walls, are eerily quiet. Contrast that with HSBC next door, where the ground floor buzzes with retail activity while upstairs, staff study corporate balance sheets.
But equally, it would not take much to transform BoC into a serious local player – for three interconnected reasons.
First, it is the only commercial Chinese lender operating in Sri Lanka, and Beijing shows no sign of wanting that to change. For now, at least in terms of mainland competition, it has the place to itself.
Second, China is already the island’s key trading partner. It accounted for more inward FDI than any other country in 2017 and 2018, according to the Board of Investment of Sri Lanka. And while Pakistan has to-date been the greatest sovereign beneficiary of BRI capital in south Asia, Beijing sees Colombo as a far better long-term strategic and commercial bet. It is less volatile or Sinophobic than some regional states, with improving infrastructure and a host of existing free-trade agreements with the likes of India, Singapore, Europe and China itself. More mainland firms will set up offices and factories in the years to come, to serve both the local market, the wider region and the world beyond.
The third reason is because Bank of China is willing to lay its cards on the table – something that few mainland companies or financial institutions do unless they are pretty sure of the outcome.
Liu says BoC aims to open another branch in Port City as the project opens up, in stages, from 2020. Sources say the bank will also open a branch in the area around Hambantota, to provide banking facilities for dozens of mainland firms keen to serve not just the port but an increasingly industrial, commercial and residential hinterland.
Liu says the Colombo branch will become a focal point for the bank in the region: “From here, Bank of China will also serve Nepal, Bangladesh and the Maldives. But not Pakistan or India.”
Already, Bank of China is looking ahead to the opening of Port City. While vast in scope – it is expected to attract upwards of $13 billion in investment – no one, not even the Sri Lankan or Chinese governments, quite knows what it will become. But it is safe to assume that a big part of its role will be to act as an offshore financial hub operating under international rules, serving the wider region.
“Port City can become an offshore renminbi clearing market, just as London acts as an offshore euro clearing market,” says Richard Rodrigo, chief compliance and coordinating officer at BoC in Colombo. “Bank of China will have a renminbi reserve which will provide us with a big opportunity to serve our customers purely in renminbi, issuing letters of credit and settling trades and transactions.”
He admits there is not much demand for renminbi-denominated settlement services at the moment, adding that local corporates “are very scared about transacting in renminbi because of the cost. But that just means it is up to us to create the market for them”.
In a follow-up email, Rodrigo clarifies: “We are in a position to provide renminbi clearing services. Now that we are in Sri Lanka, local importers from China could use our services to move away from US dollars, leading to lower bank charges and [lower] forex risks. We, too, intend promoting such services shortly.”
For that to happen, two things need to take place. First, Sri Lankan companies need convincing that the renminbi is on course to become a powerful international currency. And second, local firms and lenders need to be comfortable handling and settling trades in renminbi.
If indeed the renminbi is to become a true reserve currency, it is likely that its journey to global domination will start in places that are relatively small, friendly, politically stable and financially and economically open. Markets, in other words, like Sri Lanka’s.
Beijing is certainly giving the island the big sell. It has been pressuring the government to issue an inaugural sovereign panda bond for more than a year.
In February, the Central Bank of Sri Lanka finally said it would print a $2 billion sovereign bond, one half priced in dollars, with the rest denominated in an equal mix of renminbi and Japanese yen.
Once that sale is completed, BoC’s Rodrigo expects panda bonds “to become a key part of funding and financing in Sri Lanka over the next five years. China Harbour’s regional office is here, and more mainland firms, specializing in construction and infrastructure and services, will follow. For many of them, their regional cash management needs will be met here in Colombo.”
It’s an unstated assumption at 40 York Street that BoC will get the majority of that new business.
Will BoC become the leading onshore lender in Sri Lanka in a little over five years? Can it? There are certainly obstacles in the way.
Its assumption that it will garner most, if not all, new inbound mainland business overlooks the product and market strength of HSBC, the largest foreign lender operating in both Sri Lanka and China, not to mention Standard Chartered and Citi.
When the Chinese lender’s near-term ambitions are put to foreign bankers, they scratch their chins. One dismisses out of hand the idea of BoC becoming the biggest onshore foreign bank by the mid 2020s, but then reverses course and says: “Well, it’s possible. Look how fast the BRI got real.”
Another adds: “It will take time – longer than they probably realize. But just serving Chinese companies [operating locally] is going to provide a lot of future business.”
And while Liu and Rodrigo talk up the profit to be pocketed by serving China-facing Sri Lankan firms, the truth is that precious few local companies have visited China, let alone invested there.
Beijing accounts for 20% of Sri Lankan imports but fewer than 2% of its exports, while the island’s trade deficit with China made up half of its overall deficit in 2016 and 2017, according to central bank data.
Rodrigo jumps in at this point, keen to contest the suggestion that the bilateral trade relationship tilts unhealthily in China’s direction.
“Sri Lanka will become a major transshipment hub which should rebalance the relationship,” he says. “We recently organized a match-making session in Shanghai, introducing local SMEs to potential partners in China.”
But still the point remains.
Liu suddenly announces that the bank’s country manager, Wang Chuan, can meet briefly. It was understood he was unavailable, but suddenly here he is, a short and wiry streak of pent-up energy.
Wang apologizes for not being able to make more time, and says he is rushing to catch a flight to Beijing. All the bank’s country managers are assembling for a one-month conclave in the Chinese capital, where they will meet with senior management and be handed a list of market-specific budgets and targets for years to come.
“Only then will I have a better idea of what [Bank of China] wants to achieve in Sri Lanka,” he admits. “This is a very important moment for us.”
The next few years will be instrumental in China’s next stage of development. Beijing has been vocal in its desire to internationalize its currency, but it also needs to internationalize its big banks, transforming them into universal lenders able to offer world-class banking services wherever they go and to compete with the likes of HSBC or Citi.
On the way out, we pause in the foyer while Liu asks a few questions. Most of them pertain to the market’s big foreign banks, notably HSBC. She is keen to know how strong they are locally in retail banking, corporate banking and credit cards. The answers, mostly educated guesses, elicit nods and frowns and even the occasional smile. (“Ooh, such a small market share,” she says at one point).
It is suddenly clear that not only has the interview turned 180 degrees, but that that was what was happening all along. While fielding questions in the meeting room, Liu was quietly and unobtrusively gleaning lots of tidbits of fact and data, rumour and gossip. It’s impressive in its own way – though it does leave you wondering how much BoC really knows about the Sri Lankan market.
Before we say farewell, the eye is drawn to a row of gold letters inscribed in a display case above the forlorn-looking plastic tree. They repeat the same words in Mandarin and English: “Building Bank of China into a World-Class Bank in the New Era”.
With any other financial institution, it might seem a bland, meaningless slogan. But with Bank of China, it feels more like a statement of intent.
CSE eyes a Chinese future
After years of near-inactivity, the Colombo Stock Exchange’s chief executive is hopeful of a brighter outlook involving demutualization, listing and an infusion of capital and knowledge from a strategic partner – and China’s big bourses look like the front runners
A decade on from the end of a long and bruising civil war, Sri Lanka is finding its feet. For now at least, it is economically and politically stable. Investment is flowing in, from China in particular. And a new city, taking shape off the shores of the capital, is intended to transform Colombo into a regional financial hub.
But while the country rediscovers its hustle, its capital markets are found wanting. Since the start of the decade, according to data from Dealogic, just 34 initial public offerings have been completed on the Colombo Stock Exchange (CSE), worth a combined total of $249 million.
Foreign institutional investors, or FIIs, largely give the island a wide berth. Many are automatically deterred by its frontier-market status. Those that do come to play find a bourse that, by common consent, hosts the stocks of just two firms with any genuine heft: Commercial Bank of Ceylon, which is Sri Lanka’s largest private lender, and John Keells, a sprawling local conglomerate.
And FIIs, for a myriad of reasons, are currently more likely to leave than to stay: according to CSE data, net capital outflow by foreign funds in 2018 reached a total of $67 million. That exodus continues, with another $23 million parting ways with the country in the first two months of 2019.
But could the fortunes of Sri Lanka’s moribund capital markets be about to take a turn for the better?
When Asiamoney meets CSE chief executive Rajeeva Bandaranaike in Colombo in early 2019, he is surprisingly chipper. A new small and medium-sized enterprise-dedicated board called ‘Empower’ has generated strong interest since its launch in July 2018, and he is confident of ushering in the first smattering of listings by smaller firms in the first half of the year.
In January 2019, the bourse amended its listing rules and set up a multi-currency board that allows foreign firms to pursue a secondary listing in Colombo. Companies will be limited to raising additional capital onshore in US dollars at first, but the door has deliberately been left open to future secondary stock sales priced in the likes of Chinese renminbi and Japanese yen.
The CSE chief says he also plans to approve the first onshore real estate investment trusts, or Reits, before the end of the year. That mirrors events across the Palk Strait, where Blackstone and its local partner Embassy Group were, at the time of publication, finalizing India’s first onshore Reit, valued at $1 billion.
But the big step-change will be the demutualization and listing of the stock exchange itself. The former is pending, a draft law having been sent to and approved by the cabinet in early 2018, with the aim of converting the bourse into a for-profit company. If parliament does not approve the bill before the end of the first half of the year, demutualization may take place after the presidential elections, which are slated to take place no later than December 2019.
The exchange would be “an attractive proposition” for investors- Rajeeva Bandaranaike, CSE
Once the bourse is converted into a public company, “it would be in a position to offer an equity stake to a strategic partner,” says Bandaranaike. “Ideally, the partner would be someone who can transfer knowledge [to us] and provide input on technology and new products, which will help us to diversify the exchange.”
An equity sale would be beneficial to both parties, he believes. On the one hand, the CSE is, he admits, still “largely a single-product market – namely an equity market and a small corporate debt market”. A fresh injection of capital and new thinking would add breadth and depth to both.
On the other, he believes the bourse would be an “attractive proposition” for many investors, given the strength and openness of the economy and the number of big state firms that are unlisted but well-run and keen to pursue stock sales. Once a partner is in place, the exchange will look to list on its own main bourse.
The obvious investor would be an arm of the Chinese state, for two reasons. First, because Port City, the new financial hub taking shape in Colombo, is funded and driven by China and destined to become an offshore renminbi trading hub.
And second, because Beijing already owns stakes in two regional markets. In 2016, the Shanghai and Shenzhen stock exchanges joined forces to buy a 40% stake in the Pakistan Stock Exchange. And in May 2018, the two combined to outbid India’s National Stock Exchange to snap up a 25% stake in Dhaka Stock Exchange.
Bandaranaike denies having had “any interactions with [either] of the two Chinese exchanges”. But two well-placed individuals in the capital say preliminary talks between Colombo and Beijing have already taken place.
“China is quite aggressive and determined on this issue, and I don’t think anyone [in Colombo] will have any objections,” says one of those sources.
The CSE chief sets out a vision of the future in which the bourse he runs becomes a “demutualized, listed, diversified and profitable exchange competing in the emerging markets space” over the next five to 10 years.
China is central to the future of the CSE and Sri Lanka’s wider capital markets, but so too, he adds, are corporates and capital from the likes of the UK, the US, Singapore, Australia, India and Japan.