Remember back in 2001 when Gordan G. Chang, a popular China based American lawyer, predicted the “Coming Collapse of China“? Whatever happening to that guy? For awhile, he had certain Sinophobes overjoyed and they showed their gratitude by making him a popular talking head on every major news network in the U.S. So much for his 15 minutes of fame. His big claim was some perfect storm of China joining the World Trade Organization (WTO), a run on the banks that would collapses the economy, and in turn causing popular uprisings that would topple the communist party. Like much voodoo laden astrological based futurology it did not come to pass and Mr. Chang has not been seen for a number of years, although he wrote a book about N.Korea nuking Japan in the last year.
Contrary to Mr. Chang’s clairvoyance, China’s banks are showing increasing competitiveness internationally. There investments in Africa are especially interesting.
”Chinese Banks Becoming Powerful Factor in the Global Financial Sector” n October 25, Industrial and Commercial Bank of China (I.C.B.C.), the world’s largest bank by market capitalization, announced that it would purchase a 20 percent stake in Standard Bank, South Africa’s largest bank. If the US$5.6 billion deal is approved, it will be the largest foreign direct investment in South Africa since the end of apartheid in 1994 and the biggest overseas investment by a mainland Chinese company.
Altering its Approach to Africa
The deal is a logical extension of China’s shifting approach to Africa, which PINR first outlined in February, but it also demonstrates the growing power of China’s banking sector. Until recently, most observers have focused on the bad debt held by Chinese banks, in addition to the lack of internal controls. However, with some strategic help from the Chinese Communist Party (C.C.P.), China’s banking sector appears posed to grow into a powerful factor in the global financial sector. [See: “China Adjusts its Approach in Africa”]
Whereas China remains primarily interested in securing access to Africa’s natural resources for its growing economy, this year has marked an evolution to the arrangement in which China increasingly involves itself in African politics in order to foster a better business relationship.
On the security front, China has pressured Khartoum to accept a U.N. peacekeeping force in Darfur and has taken command of the U.N. peacekeeping mission in Western Sahara. Whereas last year Beijing threatened to cut relations with Zambia if opposition candidate Michael Sata won the presidential elections, in recent months Beijing has quietly pulled back from its unquestioning support of Robert Mugabe in Zimbabwe, coordinating its strategy with South Africa and neighboring countries.
Economically, Beijing has used forums like the Summit of the Forum on China-Africa Cooperation held in Beijing in November 2006 to show its desire to invest in African industries outside of natural resources and infrastructure projects that support the extraction industries. Although until the Standard Bank deal was announced the figures paled in comparison with those involved in the resource industries, China has also invested in greater value-added industries in Africa, such as hospitality, service, and telecommunications. Also, at least since President Hu Jintao’s February tour of Africa, China has worked closer with African leaders to protect politically sensitive industries in Africa such as textiles.
I.C.B.C. is a state-owned bank and its leadership is intertwined with that of the C.C.P. Therefore, it is nearly certain that political considerations factored into the bank’s decision to invest so heavily in South Africa. The deal, however, makes sense in business terms as well as strategic.
China Taps into Frontier Markets
Standard Bank has operations in 18 African countries, which are considered “frontier markets” by most Western financial firms. Africa outpaced the global average in terms of gross domestic product growth since 2001, and Merrill Lynch, UBS, and other banks have begun to look at the continent as an investment destination. Because of tighter risk management rules, however, Western firms have been slow to tap Africa’s potential. The deal provides Standard Bank with the capital to become the leading financial institution in Africa with access to I.C.B.C.’s holdings in China. In return, I.C.B.C. is able to diversify its reserves away from the mainland, with the upside potential of being part of Standard Bank’s dominance of one of the world’s last underserved markets.
Up until the past year, Chinese banks largely focused on securing capital and experience from Western financial firms in order to shore up their balance sheets. In fact, it seemed likely that many Chinese banks would not be able to survive due to their high levels of bad debt. Now, due to China’s trade surplus and the bubble in its domestic stock markets, Chinese banks are flush with cash and looking to invest overseas. [See: “Can China Deflate Its Stock Bubble?”]
Like Chinese oil companies, most banks are able to draw on their connections with the C.C.P. to take on greater risks than the competition from other countries. This is certainly one factor in I.C.B.C.’s deal with Standard Bank. In other cases, Chinese financial firms are able to use their cash-rich position to forge strategic alliances with foreign firms on beneficial terms. For example, in October, Citic Securities was able to buy a stake in Bear Stearns after the New York-based company was hit with large losses on subprime mortgage investments.
Chinese Banks Poised to Enter U.S. Markets
Chinese banks may also regain access to the U.S. market soon. Chinese banks have been effectively banned from operating branches in the United States since 1991, but the Federal Reserve is reviewing applications from I.C.B.C. and China Merchants Bank to open branches in New York. China Merchants is better positioned for approval because it has operated without state support for years, which means that its operations are more transparent with demonstrable risk controls.
Regulators in China are said to be waiting for Washington to approve access for Chinese banks in the United States before Beijing further loosens the rules regarding foreign banks operating in China. Because many U.S. banks are salivating at the growth potential of the Chinese market, it seems likely that China Merchants’ application will be approved.
It appears that Chinese banks are positioned to become major factors in global financial markets. They are flush with cash and have learned from partnerships formed with Western firms in recent years. As a result, the I.C.B.C.-Standard Bank deal may prove the first of many similar deals.
From a geopolitical perspective, this would be an important development. It would mean that the world’s financial engine is becoming even more dispersed. New York’s and Tokyo’s financial sectors have lost market share to London and Hong Kong in recent years. While China’s mainland financial sector is largely protected from foreign competition and its markets are limited to mainland investors, the growth of Chinese banks during the past few years indicates that Shanghai may soon be able to compete on a global scale.
While Goldman Sachs arranged the I.C.B.C.-Standard Bank deal, Chinese banks are proving that they have soaked up a great deal during the past few years from the partnerships they have formed with Western firms. As a result, it may not be long before I.C.B.C. is acting as the matchmaker for a similar deal by a smaller Chinese bank.
It should be noted, however, that China’s development remains a highly coupled system, in which many events could trigger an economic slowdown. While a financial fallout does not appear likely right now, there are many factors in play that could reverse this trend — rising inflation, the stock market bubble, environmental damage, social unrest, an aging society, a miscalculation over Taiwan, among others. The cash position of most Chinese banks should provide some resiliency to these events, but their rise is not inevitable.
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