Deals Ｐｏｏｒ　Ｄｅａｌｓ？

　　China’s banking sector is being fully opened up this year. But debate continues 　　on whether stakes to foreign investors are going for a song
　　
　　After two years of reform of state-owned commercial banks, China Construction Bank (CCB) was finally listed at the end of 2005, but many issues remain to be resolved.
　　The listing was undoubtedly the most striking development of China’s financial sector in 2005. Before it went public, CCB had already drawn investment from Bank of America and Singapore’s Temasek Holdings. The American bank had made itself the top investor with a one-time input of $3 billion. With CCB’s listing, huge profits for these strategic investors have triggered heated debate in China: Is the stock transfer right? Is it wise to bring in foreign investors? Will state assets flow out?
　　In fact, suspicions over asset outflow of state-owned commercial banks have never really cooled since China began its shareholding reform. Statistics reveal that when Bank of Communications sold stakes to HSBC in 2004, it gained a premium of 86 percent, but CCB’s transfer of equity only brought in a premium of 17 percent and Bank of China’s even less--about 10 percent. The sale of stakes by the Industrial & Commercial Bank of China is expected to bring in a premium of 10 percent at most. Before CCB went public, it sold 10 percent of its stake to Bank of America at $3 billion in a strategic cooperation, when the bank’s total assets amounted to about 3.5 trillion yuan ($437.5 billion). These were later followed by the equity sale by Bank of China and the Industrial & Commercial Bank of China to Citibank and to Halifax and Bank of Scotland (HBOS) respectively. All of this triggered discussion over whether Chinese banks were selling themselves at unfairly low prices.
　　Some even argue that $10 billion for 10-15 percent of the stake in China’s three major state-owned commercial banks will turn out to be an unprecedented event in world financial circles.
　　Investors queue
　　Recent years have seen a rising enthusiasm on the part of foreign financial giants for China’s banking sector. HSBC, Bank of America, Singapore’s Temasek Holdings and Royal Bank of Scotland have all paid billions of dollars for stakes in such state-owned banks as Bank of Communications, China Construction Bank and Bank of China. The Industrial & Commercial Bank of China, Huaxia Bank and Guangdong Development Bank are now in talks with potential foreign partners.
　　According to China’s current policies, the stake held by a single foreign shareholder in a Chinese bank should not exceed 20 percent and the total stake held by foreigners should not exceed 25 percent. These policies are aimed at preventing a massive outflow of state-owned banks’ assets. Nevertheless, the media was told by Han Mingzhi, Director of the International Department of China Banking Regulatory Commission, that the CBRC had already set up special working teams to assess the current policies. In his opinion, foreign shareholders are likely to hold a higher stake in Chinese banks.
　　According to Han, more foreign banks are expected to cooperate with China’s banking sector in the years to come. Bill Rhodes, Vice President of Citigroup, said recently in Shanghai that Citibank would increase its shareholding in the Shanghai Pudong Development Bank to 19.9 percent, making it the bank’s largest shareholder. Rhodes admitted that if permitted, Citigroup, would buy 50 percent of the bank’s stake. Besides, HSBC also expressed its ambition to increase its current 19.9 percent shareholding when the opportunity rises.
　　Those who believe Chinese banks are sold too cheaply believe that after large-scale readjustment and the relief of non-performing assets, the internal value of these banks has greatly improved. Besides, they also possess such valuable intangible assets as the government’s credit and a vast commercial network.
　　As a matter of fact, far from being welcome in the world’s financial community, as some people thought, the assets of Chinese banks have long been under suspicion. Before CCB went public, few investors had many expectations from China’s banking system reform. Hence, when China Everbright Bank and Bank of Shanghai took a lead in selling stakes to foreign strategic investors as early as in 1996 and 1999, their pioneering effort was greatly acclaimed by the public.
　　From an urban credit union haunted by non-performing assets and bad loans, Bank of Shanghai had greatly improved in terms of value when it attracted the attention of foreign banks. It receives technical instructions from HSBC and is also allowed to issue credit cards marked with HSBC. As a result, it has made great headway in management, performance and profits.
　　However, when the four major state-owned commercial banks began to pick up the pace for listing while carrying on reforms of non-tradable shares, the public could not help feeling suspicious about their cooperation with strategic foreign investors: Are Chinese banks losers in the cooperation? If they don’t get involved with foreign investors, can these banks not go public and complete their reforms?
　　
　　Selling price
　　
　　The fact that overseas strategic investors have gained huge profits has finally resulted in arguments over CCB’s share price to foreign investors after going public.
　　Vice Governor of CCB Fan Yifei said, “All foreign investors have offered higher share prices than the domestic ones.’’ According to his explanation, when CCB sold 9 percent of its total stock of 194.3 billion yuan ($24.3 billion) at $2.5 billion to Bank of America, every share was worth 1.065 yuan ($0.13). This price was 6.5 percent higher than that offered by such domestic enterprises as the State Grid Corporation of China, the Shanghai Baosteel Cooperation and the China Yangtze Power Co. Ltd. What’s more, of Bank of America’s $2.5 billion worth of shares, $500 million were bought at the initial public offering price.
　　Is this trade profitable to foreign investors? According to Guo Shuqing, Governor of CCB, Bank of America has bought CCB shares at a 1.15 P/B ratio (price-to-book ratio), that is, every $1 worth of net assets is sold at $1.15. When it comes to Singapore’s Temasek Holdings, the ratio is slightly higher, at 1.19. Although they lag behind the 1.96 P/B ratio of the issue price, the participation of world-famous financial institutions is valuable in itself, as the strategic investors bring in advanced managerial and technical methods and also share some market risks with the CCB. Besides, the alliance of these investors will also help to ensure the success of CCB’s initial public offering.
　　But China is not without reasons in bringing in foreign investors. According to Wang Jianxi, Vice President of Central Huijin Investment Co. (a state-owned company that is in charge of capital injections in the Bank of China and China Construction Bank), 10 percent of the stocks of Bank of China and China Construction Bank amount to about $3.1 billion, a figure few Chinese institutions can afford. Even such “giants” as CNPC (China National Petroleum Corporation), the State Grid Corporation of China and the China Life Insurance Company will find it hard to cope with the price.
　　
　　Who will be the boss?
　　
　　At a time when Chinese banks are trying to integrate into the world financial community through proactive reforms, foreign investors are playing an increasing role in the financial sector. China’s WTO commitment to open up the entire banking sector by 2006, is engaging the attention of foreign investors--especially to its $1.65 trillion resident deposits.
　　If they intend to secure a foothold in China’s financial market, strategic foreign investors will surely want to bring local branches under their full control after they have already benefited from China’s relaxing of controls over some businesses. This, in turn, gives rise to worries that the listing will result in the loss of part of or even the whole shareholding of state-owned commercial banks.
　　Actually, the “full circulation of shares” conforms to international practice. There is no basis for undue worry. First of all, the state will maintain absolute control over the stakes of major state-owned commercial banks. Second, big shareholders of China Construction Bank, such as Bank of America and Singapore’s Temasek Holdings are restricted by certain lock-up periods, so financial markets will not be influenced by sharp fluctuations. Third, Bank of America, China Construction Bank’s largest foreign shareholder, has only 19.9 percent of the bank’s stake, a condition that has already been written into the cooperation agreement between the two sides. Currently, 25.7 percent of CCB’s stock is in the hands of individuals and foreign financial institutions while more than 74 percent belongs to the state. Even if Bank of America takes another 10 percent of the stake in future, the state will still have a shareholding of more than 60 percent. Moreover, as CCB continues its offering of stock, its shares will be divided among more shareholders, which will prevent a particular foreign holder from controlling too many shares.
　　Some experts hold the view that the largest problem facing China’s financial and economic security is not the transfer of some stakes to foreign banks, but such issues as inadequate capitals, growing non-performing assets and fraudulent financial reporting. Joined by foreign strategic investors who bring with them rich experience and advanced operating methods, China’s state-owned banks will be able to build themselves into modern shareholding commercial banks with strong competitiveness in world markets.
　　Ba Shusong, Deputy Director of the Financial Research Institute of the Development Research Center of the State Council, said that while availing themselves of opportunities presented by the fast-growing financial market in China, foreign investors will also share some business risks with their Chinese partners. Against the backdrop of strategic cooperation around the world, Chinese banks should not feel restrained by the accusation of “banks on sale.” As for China’s banking regulatory department, their responsibility is to strengthen supervision over domestic banks and the reach and operations of foreign investors.
　　

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