Overseas expansion
Tan Wei

THE Industrial and Commercial Bank of China (ICBC), the world’s biggest lender by market value, will acquire a 20-percent stake in South Africa’s Standard Bank for $5.5 billion, said ICBC President Yang Kaisheng, at the 4th Annual Conference of International Finance Forum just concluded on November 8. If the acquisition is closed smoothly, it will be a milestone for China’s commercial banks that are striving to deliver a better performance on the global financial stage. Differing from the small Bank Halim of Indonesia and Seng Heng Bank of Macao which the Chinese bank purchased several months ago, Standard Bank of South Africa is truly a major international bank. Standard Bank has a presence in 18 African countries and 19 major financial centers in Europe, North America and Asia, and is focusing its expansion in burgeoning markets. It topped all other African banks in terms of assets and profits and ranked 106th in the Top 1,000 World Banks by The Banker magazine last year.
Besides this recent news, China Minsheng Bank Corp. also announced on October 8 that it would pay up to 2.5 billion yuan ($333.3 million) for a 9.9-percent stake in UCBH Holding Inc., the Nasdaq-listed parent company of U.S.-based United Commercial Bank. This was the first overseas acquisition of the Beijing-based mid-sized lender as well as the first ever acquisition of a U.S. bank by a Chinese bank. On November 8, China Merchants Bank got the green light from the U.S. Federal Reserve for opening a branch in New York-the first nod given by the financial security watchdog to a Chinese bank for branch operations in U.S. territory after it implemented the Foreign Bank Supervision Enhancement Act of 1991(FBSEA).
In recent years, more Chinese banks including the Bank of China (BOC), China Construction Bank (CCB) and China Development Bank (CDB) have concluded overseas acquisitions deals. “The domestic market will remain the major source of profits for Chinese banks for quite a long period of time,” said Guo Tianyong, Director of the Research Center of the Chinese Banking Industry under the Central University of Finance and Economics. “But confronted with foreign banks keen on securing larger stakes in the Chinese market, Chinese banks have to get stronger through investing overseas, and it’s undoubtedly an effective way to lower risks.”
Bigger and stronger
The two-way opening up of China’s financial industry-allowing foreign banks to invest in the Chinese market and encouraging domestic banks to seek shares of overseas markets—is a trend of globalization, said Peng Xingyun, a researcher with the Financial Research Center under the Chinese Academy of Social Sciences. Nobody would have taken Peng’s opinion seriously if he had expressed it several years ago when almost all China’s commercial banks suffered from non-performing loans (NPLs) accumulated before the 1990s, and extremely low capital adequacy rates which failed to offset any risk.
“Huge changes have taken place in China’s banking industry in recent years,” said Peng. China’s banking sector has taken on a new look due to the fact that all major state-owned commercial banks have taken pains to rid themselves of historical burdens, lowering the rate of NPLs and preparing for IPOs through shareholding reform over the past several years. For example, CCB, BOC, ICBC and some regional shareholding banks have been listed on the stock market and attracted overseas strategic investors in succession after 2003. By September 30, 2007, ICBC, CCB and BOC ranked, respectively, the world’s first, fifth and sixth largest listed banks by market value.
It has been a must choice for Chinese enterprises eager to overcome their development bottleneck to invest overseas in order to obtain resources, energies, brand influence and sales channels, and the banking sector is no exception. “It’s the right time for Chinese banks to launch overseas expansion,” said Luo Zhiheng, General Manager of BOCI Research Ltd. “The great pressure of renminbi appreciation and excess domestic liquidity needs to be eased by investing overseas, and besides, it will be a good bargain for Chinese banks to purchase international financial assets against the backdrop of China’s bullish stock markets and excess foreign exchange reserves.”
By the end of the third quarter this year, China’s foreign exchange reserves had swelled to $1.43 trillion, remaining the world’s largest. China still faces severe liquidity. The net injection of money was 195.8 billion yuan ($26.1 billion) for the first three quarters of this year, a year-on-year increase of 30.2 billion yuan ($4.0 billion). As a solution, the government has founded the China Investment Corp. to soak up excess liquidity and at the same time moderately released liquidity and increased qualified domestic institutional investor (QDII) quotas to encourage the outflow of capital from China. “Against this backdrop, Chinese banks could avoid risks in the exchange rate market and help to ease the pressure on the government from its huge forex reserves through overseas assets acquisition,” said Guo. Cai Esheng, Vice Chairman of the China Banking Regulatory Commission (CBRC), made it explicit that the CBRC would actively encourage and support Chinese financial institutions to seek overseas expansion.
Stepping stones to success
“Cross-border mergers and acquisitions have been a major method for a majority of Chinese banks to tackle overseas markets in recent years,” said Yang. “The world’s top 10 banks by market value last year all got bigger through merger and acquisition activities.” According to Xia Bin, Director of the Institute of Finance Research under the Development Research Center of the State Council, overseas acquisition is the most convenient way for banks to implement global expansion strategies as it helps to augment their capital size. “The size of a bank changes in direct proportion to customer trust as well as the bank’s market share,” said Xia. “An impressive size endows a bank with a competitive edge, and acquisition also helps a bank to save resources, optimize resource allocation, increase its market shares, lower its operational costs and augment its profits. “
Burgeoning markets are the targets of acquisition for many Chinese banks. “ICBC will particularly keep an eye on the emerging markets because of the high growth and development potential there, “ said Jiang Jianqing, ICBC’s Board Chairman, explaining why they took an interest in South Africa’s Standard Bank. “Besides, the banking sector in these markets opens up faster to allow in more and more cross-border acquisitions. “ China’s banks have seldom gained a foothold in regions enjoying huge business potential such as South Asia, the Middle East, Africa and Latin America, Wang Lijun, General Manager of BOC’s Overseas Branch Department, pointed out. But for China’s commercial banks, these regions will offer remarkable opportunities for business expansion and growth. “The Asian market will become a main stage for Chinese banks to carry out their overseas expansion strategies in the coming few years,” Guo said. “Compared with the European and American financial markets where the supervision is rigid, the cost is high and the chances are rare for any acquisition, the Asian markets provide huge potential for profits and demand low costs for acquisition. “Risks and uncertainties
Overseas expansion has never been as smooth as ambitious Chinese banks have expected. For instance, China Development Bank and China State Investment Co. are suffering heavy losses from their overseas investments, respectively in Barclays Bank of England and the U.S. Blackstone Group.
According to Luo, the major problem with Chinese banks’ overseas expansion is high bidding. “Even some large mature banks will make such mistakes,” said Luo, citing the famous deal of the Development Bank of Singapore (DBS) acquiring Hong Kong’s Dao Heng Bank in 2001. DBS merged Dao Heng at a price three times higher than its book value, and as a result a term “Singapore premium” was created to refer to acquisitions at a high price in the international financial market. Currently, in other fields of merger and acquisition, the term “China premium” is prevailing. Whether it will be frequently referred to in the banking acquisition lexicon remains a question.
Furthermore, lack of experience will also bring Chinese banks great risks in cross-border acquisitions. “Apart from economic risks, there are also risks related to politics and sovereignty,” said Peng. “Some Western countries, in fear of China’s rapid economic growth and globalization progress, will consolidate their political intentions and foment nationalist agitations in its people.” High-quality services are the only key for Chinese banks to tackle overseas markets, according to Guo. “The biggest risk rests with whether they can adapt their management style to the needs of overseas operations,” said Guo. Guo also pointed out that China’s commercial banks, except for the Bank of China, all lack experience in overseas operations and remain domestic bank in terms of their management, business concepts, and the competitiveness of their staff.

(The Daily Mail-Beijing Review Articles Exchange Item)



Two states or one? Time to choose
John V. Whitbeck


ALMOST immediately after the hollow show in Annapolis, a ray of hope has appeared from an unexpected source — Israeli Prime Minister Ehud Olmert. In an interview published on Nov. 29 in the Israeli daily Haaretz, he declared, “If the day comes when the two-state solution collapses, and we face a South African-style struggle for equal voting rights (also for the Palestinians in the territories), then, as soon as that happens, the State of Israel is finished.” This Haaretz article helpfully referred readers to a prior article, published by the same daily on March 13, 2003, in which Olmert had expressed the same concern in the following terms: “More and more Palestinians are uninterested in a negotiated, two-state solution, because they want to change the essence of the conflict from an Algerian paradigm to a South African one. From a struggle against ‘occupation’, in their parlance, to a struggle for one-man-one-vote. That is, of course, a much cleaner struggle, a much more popular struggle — and ultimately a much more powerful one. For us, it would mean the end of the Jewish state.”
Briefly, the Palestinian leadership appeared to have noticed Olmert’s nightmare. On Jan. 8, 2004, Ahmed Qurei (then the Palestinian prime minister and, more recently, the chief Palestinian negotiator in the run-up to Annapolis) declared that the wall being built through the West Bank represented an “apartheid solution” which would “put Palestinians like chickens in cages” and “kill the two-state solution” and concluded: “We will go for a one-state solution. There is no other solution.” Three days later, he reaffirmed this position as he stood before the wall. Unfortunately for the Palestinians and for the causes of justice and peace, there was no Palestinian follow-up. Now, almost four years later, Olmert has flung open the window of opportunity so wide and so publicly that it is barely conceivable that any Palestinian leadership could fail to notice and jump through it.
Throughout the long years of the perpetual “peace process”, deadlines have been consistently and predictably missed. Such failures have been facilitated by the practical reality that, for Israel, “failure” has had no consequences other than a continuation of the status quo, which, for all Israeli governments, has been not only tolerable but preferable to any realistically realizable alternative. For Israel, “failure” has always constituted “success”, permitting it to continue confiscating Palestinian land, expanding its West Bank colonies, building Jews-only bypass roads and generally making the occupation even more permanent and irreversible. In everyone’s interests, this must change. For there to be any chance of success in the new round of negotiations, failure must have clear and compelling consequences which Israelis would find unappealing — indeed, at least initially, nightmarish.
If Israeli public opinion could be brought around to sharing the perception of their position and options reflected in Olmert’s public pronouncements, the Palestinians would be entering the “continuous negotiations” due to commence on Dec. 12 in a position of overwhelming strength — intellectually and psychologically difficult though it would be for them to imagine such a role reversal. All that the Palestinian leadership now needs to do is to agree, very publicly, with Olmert. It should state promptly that, if a definitive peace agreement on a “two-state basis” has not been reached and signed by the agreed deadline of the end of 2008, the Palestinian people will have no choice but to seek justice and freedom through democracy — through full rights of citizenship in a single state in all of Israel/Palestine, free of any discrimination based on race or religion and with equal rights for all who live there, as in any true democracy.
The Arab League should then publicly state that the very generous Arab peace initiative, which, since March 2002, has offered Israel permanent peace and normal diplomatic and economic relations in return for Israel’s compliance with international law, will expire and be “off the table” if a definitive Israeli-Palestinian peace agreement has not been signed by the end of 2008. At this point — but not before — serious and meaningful negotiations will begin. It may already be too late to achieve a decent two-state solution (as opposed to an indecent, less-than-a-Bantustan one), but a decent two-state solution would never have a better chance of being achieved. If it is, indeed, too late, then Israelis, Palestinians and the world will know and can thereafter focus their minds and efforts constructively on the only other decent alternative.
It is even possible that, if forced to focus during the coming year on the prospect of living in a democratic state with equal rights for all its citizens — which, after all, is what the United States and the European Union hold up, in all other instances, as the ideal form of political life — many Israelis might come to view this “threat” as less nightmarish than they traditionally have. In this context, Israelis might wish to talk to some white South Africans. The transformation of South Africa’s racial-supremacist ideology and political system into a fully democratic one has transformed them, personally, from pariahs to people welcomed throughout their region and the world. It has also ensured the permanence of a strong and vital white presence in southern Africa in a way that prolonging the flagrant injustice of a racial-supremacist ideology and political system and imposing fragmented and dependent “independent states” on the natives could never have achieved. This is not a precedent to dismiss. It could and should inspire.

—Arab News




Is Lanka conflict being turned into a war of attrition?
Ameen Izzadeen

A RESIDENT from the war-ravaged north-east of Sri Lanka once told a sociology researcher that he was bored to death because he hadn’t heard a gunshot for a long time. The remarks came during a lull in the fighting some time ago. Life in Colombo, the commercial capital of Sri Lanka, had been lacking any violent excitement for some time. It had seen car bombs, truck bombs, train bombs and numerous suicide bombs in addition to assassinations, sabotage and attacks on vital economic and military installations. The ceasefire agreement signed on February 22, 2002 by the government of Sri Lanka and Liberation Tigers of Tamil Eelam (LTTE) saw a temporary end to violence and Colombo sprang back to life in no time as though the war never existed. The night life which had gone to sleep was alive and kicking. Night clubs, casinos, restaurants, fun fairs and entertainment joints attracted large crowds as the economy also showed signs of rapid growth with investor confidence reaching its peak. Sri Lankans who had sought refuge in countries of the developed world returned to their motherland and some even invested in real estate projects and other businesses. The absence of war for three years during which the ceasefire agreement was respected by both sides also helped us regain our freedom of movement and freedom from fear — the fear of being caught up in a bomb blast or crossfire.
A majority of the people were happy. But dirty politics, the bane of our country, scuttled hopes for peace. Ultranationalism or fanatical patriotism in the south matched by the LTTE’s deception, its lack of commitment to peace and both sides’ unwillingness to offer or accept a federal solution closed the door on peace and reignited the war. One cannot and should not blame President Mahinda Rajapaksa for taking the country back to war, though he came to office with the support of ultranationalist parties. It is obvious to any observer that it was the LTTE which provoked the Rajapaksa administration into war by trying to assassinate Sri Lanka’s Army Commander and the defence secretary, setting off roadside bombs and closing an irrigation dam in the east. The government was extremely patient and Rajapaksa had the genuine desire for peace which he wanted to achieve through negotiations. He was even willing to visit Wanni where the LTTE was running a separate administration, and meet Tiger leader Velupillai Prabhakaran. It is because of this demonstration of extreme patience, I think, the international community did not blame Rajapaksa when the war resumed in spite of the ceasefire agreement. Now Prabhakaran blames the international community for not doing much to prevent the country’s slide back into war. —Khaleej Times