The long arm of China

By Staff Writer

From MoneyWeb - Wall Street Journal
October 25 2007
By Rick Carew, Jason Leow and James T Areddy

A $5.5 billion investment by China's biggest bank in South Africa is the latest sign that China, its economy robust and its coffers flush with cash, is becoming a force to reckon with as an exporter not just of toys, sweaters and MP3 players, but of capital.

On Thursday, the state-owned Industrial & Commercial Bank of China Ltd. announced it was purchasing a 20% stake in Standard Bank, South Africa's largest bank by assets, for 36.67 billion rand ($5.51 billion). The deal will be the largest overseas investment by a Chinese entity ever.

It follows a string of billion-dollar-plus investments by China's rapidly growing finance sector. Earlier in the week, Chinese brokerage Citic Securities Co. agreed to invest $1 billion in U.S. investment bank Bear Stearns Cos. as part of a strategic alliance. Earlier this year, state policy lender China Development Bank agreed to invest $3 billion in Barclays PLC to bolster the U.K. bank's bid for ABN Amro Holding N.V. In March, Beijing agreed to pay $3 billion for just under 10% of Blackstone Group LP, the private-equity firm, through a newly formed sovereign wealth fund that is expected to make more investments.

The economic growth fueling that spending spree is continuing at its breakneck pace: Gross domestic product grew 11.5% for the third quarter, according to data released Thursday. That's slightly down from 11.9% in the second quarter but still an extraordinary rate by global standards -- especially as concerns hover over the extent of damage the subprime-mortgage crisis is inflicting on U.S. economic growth, and the balance sheets of the big U.S. and European banks.

U.S. housing-market woes and their impact on global credit markets have left many banks elsewhere in the world facing a cash crunch, and the costs of acquisitions have risen, said David D. Li, director of the Center for China in the World Economy with Tsinghua University in Beijing. "In contrast, the stocks of Chinese banks keep on rising," he added. "Liquidity is very strong. What do you do when you have cash? Invest."

And Chinese banks have cash. Insolvent and unattractive to foreign investors just a few years ago, they now rank among the world's biggest lenders based on stock-market value, thanks to Beijing bailouts and a government push to list its state banks at a time of booming share prices.

On Thursday, ICBC reported third-quarter net profit of 22.46 billion yuan ($3 billion), up 76% from a year earlier on higher interest, fees and commission income. Its assets now total a trillion dollars, and for the nine months ended Sept. 30, it had cash and cash equivalents of 427.4 billion yuan. Bank of China, another of the country's top four banks, had cash and cash equivalents of 490 billion yuan, for the six months ended June 30.

China's relentless exports and foreign direct investment bring in much of that money. The World Bank predicts China's current-account surplus will reach $378 billion, or 11.9% of forecast GDP for 2007. As that pile of cash finds its way to China's big banks, the temptation to make risky loans that add to inflationary pressures grows. So recently, China's government has begun to encourage certain kinds of capital outflows to restore some balance. That has included allowing some funds and other investors to buy limited quantities of foreign stocks and bonds.

It has also included encouraging state-owned and other enterprises to buy companies offshore, part of what the Chinese leadership has termed its "go global" strategy. Last week, at a national Communist Party congress that is held twice a decade to set development goals, party chief Hu Jintao said the country would "accelerate the growth of Chinese multinational corporations and Chinese brand names in the world market." ICBC's investment deepens China's already-close economic ties with Africa, where it had total investments of around $11.74 billion as of 2006, according to China's Ministry of Commerce. In Beijing Thursday, ICBC Chairman Jiang Jianqing said "our strategic cooperation joins the hands of Asia's largest bank and Africa's largest bank," adding that "this will help push forward the development of Africa-China trade relations."

In the U.S. and Europe, Chinese expansion remains politically sensitive, which is prompting Chinese companies to look at other countries like South Africa, and to favor minority stakes rather than outright takeovers.

Chinese offshore oil firm Cnooc Ltd.'s $18.5 billion takeover bid for Unocal Corp. in 2005 ran aground over concerns that it would compromise U.S. energy security. China's Huawei Technologies Co. recently teamed up with private-equity firm Bain Capital to take a minority stake in a $2.2 billion buyout of 3Com Corp., a pioneer of U.S. computer-networking technology. Earlier this month, Bain said it would submit the buyout for a national-security review, a voluntary move usually taken as a defensive measure when a deal could face political opposition.

Still, China's deal with Standard Bank could add to mounting concern in the West over the ability of China's government to exert economic power globally. Finance ministers from the Group of Seven leading industrialized countries last weekend debated rules for so-called sovereign wealth funds that manage money on behalf of governments, largely with China and the Middle East in mind. While the G-7 wants to continue to be able to tap Chinese funds, many political leaders in the U.S., Europe and Canada are looking for ways to regulate Chinese government purchases. Among the proposals are putting some industries off limits -- defense, media and others, for example -- and limiting the stakes that government-owned entities can buy. ICBC, China's biggest bank by market capitalization, raised nearly $22 billion last October in the world's biggest initial public offering of stock. It has almost 17,000 outlets on the mainland, but only 98 branches overseas.

Senior ICBC officials have repeatedly broadcast their interest in growing globally in both mature markets and developing countries via acquisitions. Their goals are twofold: diversifying revenue streams and better serving Chinese companies as they expand beyond mainland China. HSBC recently bought an 80% stake in Seng Heng Bank Ltd. of Macau, and last year it completed a deal for a small Indonesian lender.

ICBC has set up a small, dedicated team in its Beijing headquarters to evaluate opportunities pitched to them by investment banks and has employed its strategic partner, Goldman Sachs Group Inc., as financial adviser on deals. Goldman Sachs owns a 4.9% stake in ICBC.

In recent months, investment bankers have pitched U.S. financial-services company CIT Group Inc. to the Beijing-based lender, according to presentation materials seen by Dow Jones Newswires. CIT, of New Jersey, said it doesn't comment on "market rumors or speculation." ICBC declined to comment on the matter. Earlier this year, ICBC applied to convert its New York representative office into a branch.

In an interview Thursday, Standard Bank Chief Executive Jacko Maree said that "a lot of business we do is China driven -- resources and mining -- and we're going to direct business to each other in those areas." When asked about potential political pressure from having a major Chinese shareholder, he said: "If a deal a Chinese company wants to do conflicts with our values and principles, we're just not going to do it."

The two banks have agreed to contribute $250 million each to start up a private-equity fund to channel Chinese and global money into mining and resources companies. Private contributions to that fund are expected to bring it more than an initial $1 billion, Mr. Maree said. Standard Bank operates in 18 African countries and 21 countries outside the continent. In August, it posted a 30% rise in first-half net profit of 6.35 billion rand on brisk economic growth in its home market.

Chinese oil and commodities firms are taking aim at Africa to satisfy the country's demand for energy to fuel its fast-growing economy. Those investments, along with preferential loans granted to African governments, have drawn criticisms from the U.S. and the World Bank.

In January 2006, Cnooc agreed to pay more than $2 billion for a 45% working interest in Nigeria's Akpo field. That purchase was funded by a loan from policy lender Export-Import Bank of China. China National Petroleum Corp., the parent of PetroChina Co., has extensive dealings in Sudan that critics say supports genocide in Darfur.

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