On
October 25, Industrial and Commercial Bank of
China (ICBC), the world's largest bank by market
capitalization, announced that it would purchase a
20% 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, 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 (CCP), China's banking sector
appears posed to grow into a powerful factor in
the global financial sector.
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 UN peacekeeping force in Darfur and has
taken command of the UN 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.
ICBC is a state-owned bank and its
leadership is intertwined with that of the CCP
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 ICBC's
holdings in China. In return, ICBC 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 undeserved 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.
Like Chinese
oil companies, most banks are able to draw on
their connections with the CCP to take on greater
risks than the competition from other countries.
This is certainly one factor in ICBC'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
US Chinese banks may also regain access to
the US 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 ICBC 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 US 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 ICBC-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
ICBC-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 ICBC 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.
Published with permission
of thePower and Interest News
Report, an analysis-based
publication that seeks to provide insight into
various conflicts, regions and points of interest
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