Wednesday, November 02, 2005

On to the next interesting topic: resistence to foreign holding of bank shares. The article below echoes a Caijing article which states that the board at Huijin voted against giving Temasek a further 10% stake in the Bank of China because Temasek's extensive ownership of Chinese banks might jeapardize "financail stablility."

Here, we basically see the resentment of rival agencies bubbling to the open against the PBOC's wheeling and dealing of late. From the Caijing article, it becomes clear that the MOF board members led the charge against granting Temasek further stakes in the BOC. But I highly suspect that CSRC and CBRC members also wanted to take a stab at the PBOC. For the past two years, Zhou Xiaochuan, with blessing from Vice Premier Huang Ju, has used the PBOC and later Huijin as a vehicle to gain control over some of the most important financial institutions in China. This has greatly angered the MOF, the traditional "owner" of financial institutions in China, as well as the CSRC, which ran the major brokerages in China until the PBOC began bailing them out through equity stakes. The BOC deal would not have come even this far if BOC had not received blessing from Zhou Xiaochuan, so clearly the other agencies wanted to embarrass Zhou with this unexpected vote.

Finally, Wen Jiabao might even be behind this one, as he tries to regain some control over Huang Ju's "independent kingdom": the financial sector. Wen's followers are mainly in the CBRC, which took over staff from the Central Finance Work Committee, where Wen had cultivated a group of young technocrats (eg Qian Xiao'an). Thus, it is not surprising that the limitation on foreign ownership now comes out of the CBRC, pointing directly against the PBOC, which is much more eager to speed up listing. This limitation will surely slow down the pace of listing (since the most eager investors are taken out of the running), which is exactly what Wen and others intend. If Huang Ju manages to list all four state banks before the 17th PC, he might gain enough "administrative merits" to hang on to power for another five years. Wen wants to avoid that at all costs. By deflating the baloon of bank listing, I expect banking reform will mire in the mud of elite politics for the next few years. While no one in Chinese politics is purely interested in reform, at least it is in Zhou and Huang 's interests to list the banks as quickly as possible. Now they have been stopped....

China setting new limits on bank ownership
Bloomberg News

SHANGHAI Bank of America and other foreign institutions that have
invested a combined $13 billion in China's banks will be required to
hold their shares for at least three years and will not be allowed to
buy stakes in more than two lenders, an official of the banking
regulator said on Wednesday.

The restrictions, in addition to an existing cap of 25 percent on
foreign ownership, are aimed at safeguarding financial stability and
preventing overseas dominance of the banking industry, Tang Shuangning,
vice chairman of the China Banking Regulatory Commission, said in a
speech in Beijing.

"We must set limits because we don't want foreign banks to gain control,
which may hurt our financial system," Tang said. "We must beware of
market monopolies."

China's government defines a foreign strategic investor as one that buys
a stake of more than 5 percent, he said, adding that such investors will
be expected to transfer management and technology expertise and will be
entitled to board representation.

China is seeking overseas capital and expertise to help strengthen
domestic banks before opening the industry to increased foreign
competition. The government will lift restrictions on overseas banks at
the end of 2006, allowing HSBC Holdings, Citigroup and other lenders to
compete for China's $1.69 trillion of local-currency household savings.

"Chinese banks need strategic investors who can bring in know-how and
improve corporate governance, rather than short-term investors such as
private equity funds," said Tang Chuan, a Hong Kong-based banking
analyst at KGI Securities. The rules disclosed on Wednesday were
"already in place but not public," he said.

A total of 18 foreign institutions have invested in 16 Chinese lenders,
Tang of the China Banking Regulatory Commission said. Joint-stock banks
like China Minsheng Banking have attracted $2.6 billion of investment
and city commercial banks $1.2 billion, according to the regulator.

In September, Bank of America paid $2.5 billion for a 9 percent stake in
China Construction Bank, China's third-largest lender.

Temasek Holdings, Singapore's state-owned investment company, paid $1.5
billion for 5.1 percent of China Construction Bank, which raised $8
billion selling shares in Hong Kong last month.

Besides its Construction Bank stake, Temasek also holds 4.55 percent of
Beijing-based Minsheng.

In August, Royal Bank of Scotland Group, Merrill Lynch and the Li
Ka-Shing Foundation agreed to pay $3.1 billion for 10 percent of Bank of
China, the second-largest lender in China, which aims to raise about $8
billion selling shares to the public in the first half of next year.

Temasek, which already has stakes in two Chinese banks, also agreed in
August to pay $3.1 billion for 10 percent of Bank of China.

However, Caijing magazine, a Beijing-based business publication,
reported on Tuesday that Central Huijin Investment, the state-owned
shareholder that now owns 100 percent of Bank of China, opposed the size
of the investment, saying it might destabilize the banking system.

In August 2004, HSBC paid $1.75 billion for 19.9 percent of
Shanghai-based Bank of Communications, China's fifth-largest lender. The
investment was the second in a Chinese lender by London-based HSBC,
which already owned 8 percent of Bank of Shanghai.

A classical example of the other side of the debate:

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