Ties That Bind - Bay Area Council Economic Institute

Bay Area-China Trade: Behind the Numbers
San Francisco-based Newbridge Capital’s $150 million purchase of an 18% controlling stake in
Shenzhen Development Bank—the first foreign controlling stake in a Chinese institution.
During 2005–06, foreign investments netted another $18 billion for 13 banks. And in October
2006 Morgan Stanley acquired 100% of Nan Tung Bank—a Bank of China subsidiary technically
classified as a “foreign-funded” bank exempt from ownership limits because it is based in Macau,
but which has one commercially licensed Southern China branch in Zhuhai. Nan Tung’s foreign
funded status and existing commercial license allows Morgan Stanley to leapfrog other foreign
competitors and apply immediately to offer a full range of derivatives, foreign exchange and
renminbi-denominated banking products to local and foreign corporate customers in China.
Foreign banks are currently allowed to make loans and take deposits in foreign currencies, and
provide yuan-denominated business services in 25 cities, but the application process is
notoriously slow.
Major change will come in 2007, as China further implements its commitments under the WTO
by allowing foreign banks to offer retail banking services, including consumer loans and the acceptance
of yuan-denominated deposits. As of June 2005, foreign banks had 244 representative
offices and 214 branches in China; assets as of April 2005 totaled more than $76 billion.
With foreign competition looming, Chinese banks aren’t sitting still. In addition to governmentinitiated
share sales to strategic investors, major banks—and even some second-tier institutions—are
raising unprecedented funds through public share offerings. This includes three of
China’s “Big Four” which have individually raised capital in the range of $10–15 billion, and together
now have a market capitalization of over $110 billion—placing them in the world’s top
ten. CCB raised $9.2 billion in an initial 2005 listing on the Hong Kong Exchange. A June 2006
IPO, the world’s largest since 2000—plus an additional share allotment—raised $11.1 billion for
the Bank of China. An ICBC simultaneous listing on the Hong Kong and Shanghai exchanges in
October 2006 was the largest IPO ever, raising in excess of $19 billion. In addition to capital,
foreign investment is bringing new skills—such as retail risk management—to China’s
financial system.
All of this activity positions Chinese and foreign-owned banks for aggressive competition in a
growing retail market segment. Consumer credit, introduced in 1997, has only recently helped
diversify lending. Mortgages, car and school loans and consumer credit last year accounted for
26% of new lending. Still, outside of joint ventures with foreign partners, banks offer few feegenerating
savings and insurance products. China had only about 12 million credit card customers
last year, almost all paid their bills in full each month, and banks have resorted to poaching
each others’ customers with increasingly costly giveaways.
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Foreign-owned banks, private equity partnerships and venture firms have stepped in to fill the
financial services gap—in trade finance and private banking services; in strategic equity investments;
and in mergers and acquisitions (M&A) and venture funding, to help companies of all
sizes achieve scale and global reach.
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