Lou Jiwei, China Investment Corporation (CIC) Chairman announced that, "with the approval by the State Council, China Huijin Investment (CHI), as a subsidiary of CIC, will participate in the reforms of CDB and ABC." CHI, which was founded in 2003 and has since then helped finance many of China’s major state-owned commercial banks, merged into CIC in September.
Zhou Xiaochuan, Governor of the People’s Bank of China (PBC), recently revealed that ABC would in the near term draw up its preliminary restructuring proposal. ABC is the only one of the five biggest state-owned commercial banks left to reform. The other four, Industrial and Commercial Bank of China (ICBC), China Construction Bank (CCB), Bank of China (BOC) and Bank of Communications (BCOM), have all received their capital injections and released their IPOs. By the end of 2006, ABC had total assets valued at RMB 5.34 trillion, a deposit balance of 4.73 trillion and a credit balance of 3.14 trillion. Still, ABC has come up with loses from their countryside dealings and is in possession of a large amount of bad assets. By the end of 2006, the bank had a bad loan ratio of 23.43% and the amount of bad loans outstanding was about 800 billion RMB. Regarding its upcoming transformation, the main questions now are how much money will the bank receive and will some of it come from overseas?
HSBC, Bank of America and Royal Bank of Scotland, as overseas strategic investors, have made large returns on their investments in Chinese state-owned banks. Although ABC is said to be a bank with bad asset quality and poor management, the bank does have has nationwide branches covering most regions, an extensive network which may prove attractive to investors.
Undoubtedly, ABC is an important target for international investors, particularly banks. Since he took office, the president of ABC, Xiang Junbo, has been very busy receiving the CEOs of various global financial institutions. But it yet remains to be seen if ABC and CDB will follow their predecessors by allowing private financing as part of their reform. International financial institutions that want to once more share the fruits of Chinese bank reforms, therefore await anxiously for the soon to be released restructuring proposals.
In middle of this month, different sources reported that, Chinalife, a major insurance company, was undergoing negotiations with ABC for buying into their bank. Reportedly, Chinalife is looking to take up as much as a 20% stake of the agricultural bank. If this is true and the deal goes through, ABC will have little room left for overseas capital.
One of the reasons ABC’s proposal may not open the doors to foreign investors is that the bank will likely list in the A-share market--or perhaps first in the A-share market and then as H-shares--which will keep stocks domestic and reduce reliance on foreign funds.
Some argue that there is still a need for ABC to turn to overseas in order to improve the bank’s level of management. To this end perhaps, a share reform plan made earlier this year made mention of allowing international investors.
But overseas financial institutions shouldn’t start the celebrations so soon. ABC is a very large bank and with the American sub-prime crisis, there are not many banks left overseas equivalent in its size and capable of supplying the requisite capital.
More importantly, ABC might already have a preferred overseas financial institution in mind. Credit Agricole Bank has been cooperating closely with ABC and is particularly attractive due to its background in serving the agricultural industry. Credit Agricole also has very strong source of capital. According to the magazine, Bankers, Credit Agricolo ranks as the world�fifth largest bank after Citigroup, Morgan Stanley, HSBC and Bank of America. On the 29th of November this year, Xiang Junbo received Mr. Rene Carron, Chairman of Credit Agricole. After reviewing their excellent history together, they supposedly reached the consensus to further cooperate with each other in a wealth of matters.
The most notable achievement brought about through the cooperation of ABC and Credit Agricole was a fund management joint venture. Credit Agricole owns 33% of the fund and ABC 52%, with the remaining 15% owned by Aluminum Corporation of China. It should therefore come as no surprise if Credit Agricole becomes ABC’s primary strategic investor.
But let’s not forget that China Development Bank will also play a role in the imminent final stages of the current bank reforms. Earlier this year, and perhaps in preparation for the upcoming changes, CDB bought a minor stake into Barclays Bank. CDB stands on a solid foundation of good quality assets, which it has earned by concentrating on long-term credit development.
In the near future CDB together with ABC is expected to receive USD 60-70 billion in capital injections.
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