Tuesday, December 06, 2005

Enclosed is yet another excellent article on the BOC-Temasek issue. Again, this reflects the complicated game that goes on between the various agencies and between Wen and Huang Ju. Zhou at the PBOC under the encouragement of Huang Ju obviously want to speed up the listing process by bringing in whoever wants to invest big bucks in the banks. Premier Wen, perhaps for ideological and perhaps for factional reason, wants to slow down the process. The MOF and the CBRC are both used to slow down the PBOC's push to list these banks rapidly. In the mean time, the MOF wants a slice of the action by having the social security fund buy a slice of the BOC. The problem for China is that there aren't that many strategic investors willing and able to plunk down so much money, and this politicking only serves to decrease the pool of potential investors. By the time you try to list ICBC, you are--to put it in the words of someone close to the listings-- "scraping at the bottom."

Investors should note that leftist ideologues are making a surprising come-back in China these days, with Liu Guoguang, a well-respected economist with some influence on the leadership, recently saying that Marxist economics should take the place of western economics in Chinese universities. Of course, the suggestion is ridiculous and would never take hold, but it shows that the leadership is again sympathetic to leftist discourse (therefore prompting the likes of Liu to say such things). As I said in a previous posting, the current leadership grew up entirely under Mao and is definitely less cosmopolitan than the previous leadership.

China regulator defends bank sales to foreigners
By Richard McGregor in Beijing
Financial Times
Published: December 5 2005

China’s top bank regulator has strongly defended the handling of overseas investments in local financial institutions, saying the rules of entry ensured that foreigners would not be able make speculative windfalls from their purchases.

Liu Mingkang, head of the China Banking Regulatory Commission, said he expected a decision soon over the sale of a stake in the Bank of China, one of the country’s big four state lenders, to Temasek Holdings, a Singapore state investment company. The debate over Temasek’s application to buy a stake in BoC has become a public symbol of a backlash within sections of the Chinese government to the sale of stakes in local banks, insurers and brokerages to foreigners.

All the indications remain that the BoC’s main shareholders will approve the Temasek application, although possibly with a smaller stake than the original application. BoC said on Monday that Temasek’s application had yet to approved by the bank’s shareholders and submitted to the CBRC for final clearance. The backlash was sparked in part by the successful initial public offering of China Construction Bank in late October in Hong Kong, which gave a short-term boost to the value of the holdings of its foreign strategic investors.

The BoC and the Industrial and Commercial Bank of China, the country’s largest lender, both have plans to attract investors in preparation for overseas listings. Until the end of October, the CBRC had approved 19 investments by foreign institutions in 16 local banks, with more announcements expected soon on further purchases.

The government has encouraged foreigners to take mostly minority stakes in the large state and city commercial banks as part of a broad-ranging effort to force the institutions to modernise their management systems.

Many Chinese banks were technically insolvent in the late 1990s, before the government began an extensive reform programme, spearheaded by taxpayer-funded recapitalisations worth tens of billions of dollars. “In order to lower the cost of (the financial sector) restructuring, we have encouraged co-operation with foreign banks,” Mr Liu said.

Mr Liu said the foreign investors were constrained by three-year lock-up periods and the necessity for them to commit resources and management to improving the Chinese banks. “With that in mind, we can see the chance for overseas strategic investors to make speculative profits is very small,” Mr Liu said. Mr Liu said that the performance of CCB’s shares since their listing – they have risen by a little over 8 per cent – showed that the issuance had been “fully priced”, and not overpriced.

Mr Liu acknowledged that the glut in Chinese industrial capacity meant that there could be an uptick in the non-performing loan ratio in the event of any economic downturn. “Awareness is a very important thing - so long as we can raise the industry’s awareness about the risks in the future, especially during any re-adjustment to squash the overcapacity, I don’t think it’s a big problem,” he said.

I don't think that this comment has anything to do with interagency rivalry at all.

The big issue is that in June, Bank of America committed $3 billion to buy 10% of CCB. With current share prices that investment looks like a bargain leading to some complaints that CCB should have asked for more. Liu's comments were intended to counter those criticisms and allay fears that BoA would flip the shares.

Also, I don't think that BoC or ICBC is doing to have any problems getting investors, so I really don't understand the "scraping the bottom of the barrel" comment.

Joseph Wang
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