| A couple of weeks ago, I had referred to the largest ever initial public offering (IPO) "" $22 billion by the Industrial and Commercial Bank of China (ICBC). Post-issue, ICBC's market capitalisation is now more than double that of the entire Indian banking industry, evidencing the transformation in the Chinese state banking sector. In fact, ICBC is now the second-largest bank in the world by market capitalisation, next only to Citigroup (which includes an insurance company), and ahead of BankAm, HSBC and Morgan Chase. |
| The transformation of the banking industry over five years, was part of the terms on which China was admitted to the World Trade Organisation. The exercise has involved a radical structural reform of the system which, at one time, was estimated to have anywhere from 30 to 40 per cent of its assets as non-performing. Given the size of the banking system, the amount was huge, not only in absolute terms, but also as a percentage of China's GDP. Much of the non-performing assets (NPAs) were over-dues from the public sector, which, evidently, looked upon the state-owned banks as their private treasuries. |
| The reforms have included establishment of an independent banking supervisory commission; recapitalisation of the state-owned banks to the extent of $60 billon; transfer of non-performing loans to asset reconstruction companies for sale to domestic and foreign investors; inviting strategic, minority (up to 20 per cent) investments from foreign banks; and, more recently, IPOs in the Hong Kong and Shanghai stock markets. The agenda also included branch rationalisation and huge lay-offs "" ICBC itself, for instance, reduced the number of employees from 500,000 to 370,000. (Incidentally, one has not come across any reports suggesting that the Leftists declared a bandh in Shanghai or Beijing.) |
| As for the prices at which shares have been sold to strategic investors, one has to admire the financial skill and savvy of the Chinese authorities. It does seem as if reformed socialists are more than capable of beating the capitalists at their own game. In the Gorbachev era, USSR's wheat buyers bought 14 million tonnes of wheat in the futures market without anyone in the US suspecting "" one hint of the scale of purchases to the market, and the prices would have zoomed. (Earlier this year, our authorities were grappling with the question of how to buy a million tonnes of wheat in world markets without moving prices.) The Chinese are proving themselves to be no less skillful in playing Wall Street's game. |
| As many as 27 of the largest international banks have bought strategic, minority stakes in Chinese banks and other financial intermediaries. The prices paid by the strategic investors, for banks which were, until recently, bankrupt, sometimes corrupt, and lacking any risk management systems and culture, were eye-popping. Besides, they also committed large investments in the form of training facilities for Chinese bankers. What they were buying was not a piece of a bank, but a piece of the China story, the promise of a 1.3 billion people market with its economic power growing at 10 per cent per annum. Interest spreads too are attractive: 2 per cent on deposits, 6 per cent plus on loans. The Chinese authorities successfully created an aura that the risks of not investing at the fancy prices, were even more than the risks of investing. And, it must be acknowledged that post-IPO, the strategic investors have made huge paper profits on their investment, and that too in a very short period of time (but they have a lock-in period and cannot cash it). Money apart, Chinese banks also hope to gain from the corporate governance standards, technology and risk management systems, which the investor is expected to bring in. (As I have argued earlier in this column, such "soft" benefits from foreign investments are often much more meaningful and beneficial than the money itself.) On his part, the foreign investor is looking at not only the investment opportunity per se, but also as a stepping stone to entry into areas like credit cards, private banking, and so on. |
| Foreign banks have also been given much more freedom to operate in the local currency market through branches and subsidiaries. This does not mean that they would be looking at branch networks rivaling those of the state-owned banks, a few of whom have branches numbering in six digits. However, they will compete not only in corporate business, but also in servicing the increasing tribe of wealthy Chinese. (Total household savings are estimated at 30 trillion yuan "" Rs 180 lakh crore.) A McKinsey report on China's banks estimated that just 2 per cent of the depositors own as much as half the deposits. And, this is the segment which would be most susceptible to competition from foreign banks and their private banking services, particularly when capital controls are loosened. This apart, foreign banks obviously have an edge in the foreign exchange market, which will help them corner exchange business as the yuan:dollar rate is increasingly freed and becomes volatile. |
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