Mar 29 2008
are china banks getting too cautious?
The weekend is here, and I guess that means its review time. It’s becoming customary here and I didn’t see a reason to buck the trend. I saw this article yesterday from Asia Times Online that notes that China’s banks are too cautious now with a bear market mentality. ( h/t to China Digital Times) Here are some excerpts:
When over 80 years of Wall Street history came to a crashing end with the demise of Bear Stearns on March 17, the shock waves of bankruptcy reached as far as Xinyuan Nanlu, Beijing. There, on the 9th floor of the Capital Mansion building, executives of CITIC Group immediately decided that there was no point in throwing good money after bad.
In October 2007, CITIC Securities, a brokerage controlled by CITIC Group, and US investment bank Bear Stearns had agreed a seemingly visionary mutual shareholding deal. Under the terms of the agreement, CITIC Securities would have taken a 6% stake in Bear Stearns for about US$1 billion, while the latter would in turn have taken a 2% stake in CITIC Securities, also valued at $1 billion.
Five months later, things looked a little different for Bear Stearns following misjudged subprime market adventures and facing a lack of liquidity. JP Morgan Chase, aided by the US Federal Reserve, was bound to fetch the whole of Bear Stearns for a mere $236 million in a speedily arranged fire sale that implied paper losses of about $985 million for CITIC Securities if its own deal with the Americans had gone ahead as scheduled. As sensible bankers, CITIC’s leaders went for the natural solution, balked at the investment and pulled out of the negotiations.
What could appear as an isolated tale of a merger and acquisition (M&A)deal gone bad might yet spell greater significance for the future evolutionary course of China’s financial markets.
In a natural extension of China’s changing approach to regulating its financial sector, the country’s largest financial institutions in the 21st century also started venturing abroad in their quest to tap into new growth areas. Consequently, with war chests bulging from their initial public offerings and/or China’s massive foreign exchange reserves, in 2007 alone Chinese financial institutions acquired equity stakes in Britain’s Barclays (China Development Bank), South Africa’s Standard Bank (Industrial and Commercial Bank of China), Belgian-Dutch financial group Fortis (Ping An) and US private equity group Blackstone (China Investment Corp).
CITIC Securities’ move for Bear Stearns also fell into this category of business line expansion coupled with increasing geographical reach. The deal’s dramatic cancellation as well as problems with other such ventures (the investments in Barclays and Blackstone have led to significant losses for the Chinese side) may induce renewed caution on behalf of Chinese policy-makers, regulators and bankers when it comes to loosening the rules governing the permissible business scope of the country’s financial institutions.
The fact that the pernicious effects of the subprime crisis will be around for a while only adds to this new cautious attitude. While caution is definitely in order in the brave new world of securitisation finance, a return to the world of rigid financial sector compartmentalization would not be in the best interest of China and the global financial system.
For one, unnecessarily strict regulation would make it harder and more expensive for Chinese firms and consumers to satisfy their increasingly sophisticated financial needs. At the same time, Western banks and securities firms are in greater need than ever of capital infusions from countries with savings to spare. Let’s hope it takes more than a wounded bear to scare off a dragon.
This is a total shame because we all know that China has a lot of money rolling around in its warchest.
Why is this important? Because I had thought that China and its attempts to inject its capital into foreign holdings and stakes in MNC’s would be taking off by now. Not that it isn’t happening, but seeing that China is becoming cautious is a bit unnerving for lawyers. It means less foreign investment, and therefore, less work to do for lawyers. I thought that the reverse M&A market and other types of corporate transactions would take off due to China’s new-found aggressiveness. (see here) Perhaps I was wrong. I hope I am not, and so for now, let’s hope that China continues to flex its financial muscles a little bit more.
