March 29,2009

Foreign Strategic Investors Losing Welcome from SOEs

By CSC staff, Shanghai
Goldman Sachs recently announced that it would not cash out 80% of its recently tradable shares of ICBC, the world's most profitable bank, for at least a year and had no intention of selling the rest in the foreseeable future. This is very smart, for with the financial crisis,
China’s state-owned enterprises (SOEs), commercial banks in particular, are no longer big fans of foreign strategic investors, and foreign investors selling off shares of state-owned commercial banks due to crisis in their home countries are likely to find the door closed to them if they attempt to return. 
 
The government’s strategy of taking advantage of foreign strategic investors to help promote reforms of SOEs, especially large state-owned commercial banks, is changing. Recently, China Telecom announced that it would postpone the introduction of strategic investors and refinance its debt instead. Just a week ago, the Agricultural Bank of China (ABC), the last of the big four state-owned banks to finish the share reform, stated again that it was not in negotiation with any potential overseas strategic investors.
 
In accordance with the Administrative Measures on Transferring Assets of State-owned Financial Enterprises, announced by the Ministry of Finance last week, foreign investors as transferees must be in line with supervision and management regulations while the transferor should report for the approval of relevant government departments. The transfer of shares of Chinese financial institutions by foreign investors shall be undertaken under the securities trading system and transfer prices may not be lower than the market price.
 
Analysts say the government intends to defuse the impact of overseas strategic investors underselling Chinese bank shares on China's capital market, and to stabilize confidence amidst the financial turmoil. 
 
Since the reform of Chinese state-owned commercial banks in 2003, many banks, including the Industrial and Commercial Bank of China (ICBC), Bank of China (BOC), and the Construction Bank of China (CBC), have introduced overseas financial institutions as strategic investors. The foreign shareholders spent only about $10 billion for 10% to 15% equity of China's three major state-owned commercial banks.
 
However, since the beginning of the financial crisis, a number of these overseas strategic investors have chosen to cash out their shares once they became tradable. Since the end of last year, Royal Bank of Scotland and UBS, investors in BOC, have sold all BOC shares they hold, profiting by about 800 million pounds and $335 million, respectively, while Bank of America, a strategic investor in CBC, reduced its holding and profited $ 1.1 billion.
 
The original intention of introducing foreign strategic investors was to promote diversification of investment, accelerate the improvement of corporate governance structure, and assist in the implementation of modern scientific management. At first, the Chinese banks saw positive change as their level of corporate governance and risk control improved and some of their desired objectives were achieved.
 
However, the real intention of overseas investors was to make money, and their dumping of stakes has affected the normal operation of the Chinese banks. Many cooperation projects between BOC and UBS fell aside with the exit of the latter. The Chinese government has awaken to the fact so-called overseas strategic investors were not in it for the strategy but for the high profits.
 
Some of these "world-class financial institutions," such as Royal Bank of Scotland and Bank of America, have suffered heavy losses during the crisis, now making suspect their "advanced experience." The Wall Street Journal admits: "Chinese bankers are usually dissatisfied with foreign consultants, who are rich in experience and knowledge but can not solve local problems, because they do not understand the Chinese domestic situation." In fact, China Merchants Bank, without the "help" of foreign strategic investors, has demonstrated strong competitiveness both domestically and internationally through its own efforts.
 
The attitude of bank supervisors is changing. Liu Mingkang, chairman of the China Banking Regulatory Commission, says that ABC has the final say in whether to introduce strategic investors in its reform and when and whom to introduce. "This must be made by its own commercial decision." Only a few years ago, supervisors made it clear that commercial banks had to bring in foreign strategic investors during share reform.
 
After China's accession to the WTO, it has fulfilled its original commitment to open financial markets, and in some areas the degree of openness is deeper than some developed countries. At the end of 2006, foreign banks held 16% equity of the total capital of Chinese-funded banks. At present, over 100 foreign banks have landed in the Chinese market.
 
However, Chinese financial institutions often face a cold shoulder when they try to enter foreign markets. At the end of last year, CCB was finally allowed to set up the first branch in the US, whereas the number of Bank of America branches in China is more than 10.
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