Wednesday, September 14, 2005

Chinese Regulators Review Cap On Foreign Investment in Banks

September 14, 2005 12:16 a.m.

BEIJING -- Chinese regulators are considering raising the permitted level of foreign investment in Chinese banks, a move that would give foreign banks more of the control they seek as they plough billions of dollars into the sector.

Han Mingzhi, director general of the China Banking Regulatory Commission's international department, said the banking regulatory agency has set up a task force to review its current policy, which limits foreign investment in Chinese banks to just 20% for one investor and less than 25% for all foreign investors.

"According to my understanding, these levels would be lifted" in a gradual approach, Mr. Han said in an interview Tuesday. He said any specific details would likely be announced by the end of 2006.

Any such policy changes in this sensitive sector would require the approval of higher-level leaders.

Talk of potentially increasing foreign ownership levels in Chinese banks comes amid a flurry of recent banking deals. China has been negotiating the sale of stakes in its Big Four state-run commercial banks and smaller urban banks amid a broader overhaul of the banking sector. Foreign investors including Bank of America Corp., Merrill Lynch & Co. and HSBC Holdings PLC have already pledged billions of dollars to take mostly small shares in Chinese banks.

While investments in the sector can provide access to local banks' sprawling national networks of outlets to sell their own products, such as credit cards, many foreign investors are eager to increase their stakes in -- and influence over -- Chinese partners. For decades, Chinese banks have been plagued by bad debt, outdated equipment and poor management and risk controls -- problems that are proving difficult to overcome even under pressure from the banks' biggest shareholder, the state.

Foreign investors buying into Chinese banks also face the risk of their partners taking on a new tranche of bad loans in the wake of Beijing's efforts to cool the economy.

Citigroup Inc. has been in talks with its partner about raising its 4.6% stake in a local lender and would welcome a higher threshold for the industry, said Richard D. Stanley, the U.S. firm's chief executive officer in China. "Further liberalization of the market will only help to accelerate a process that will have profound benefits for the banking system and the Chinese economy," he said.

David Marshall, managing director of Fitch Ratings in Hong Kong, said "a gradual liberalization would make sense (for foreign investors). If they want a meaningful presence in China, they would want to take full control of subsidiaries there." He said any relaxation in investment limits would be most meaningful for China's smaller banks, because foreign investors could take significant control at an affordable price. Also, Chinese authorities may be leery of handing over control of their biggest banks to foreign investors.

Chinese regulators are eager to attract foreign investors into the banking sector for a number of reasons. Under Beijing's pledge to the World Trade Organization, the country must fully open the banking sector to foreign players by the end of 2006. Regulators hope foreign investors can introduce modern management methods and expertise to make Chinese banks more competitive with incoming foreign rivals.

Foreign investors are also providing much-needed cash to the Chinese banks, which must meet more-stringent capital adequacy ratios by 2006, a hurdle that for many banks could prove even more difficult to overcome than the reduction of bad-loan balances. The government has injected capital into three of China's Big Four commercial banks -- Bank of China, China Construction Bank and Industrial and Commercial Bank of China -- but these banks need more cash equity to continue growing their businesses.

"It's a win-win strategy for both local banks and foreign participants," said Mr. Han. For foreign companies, "if you really want to do local business, you should be localized. Chinese banks, on the other hand, can use foreign expertise to upgrade their knowledge and managerial skills."

In many cases, it remains too early to say how effective the foreign-local partnerships will be. Strategic foreign investors, or those who take a minimum 5% stake, may designate executive directors to sit on the board of their Chinese partner bank or send management teams to help oversee operations. HSBC has seconded about two dozen staffers to Bank of Communications in various positions, including an executive vice president. Bank of America has said it will put about 50 staff at China Construction Bank.

Citibank, which holds a stake of 4.6% in Shanghai Pudong Development Bank Co., has used this partnership to develop its credit card business in China. A Citibank executive said Tuesday that the venture is issuing 30,000 new cards per month.

On Chinese banks' bad-debt problem, Mr. Han said that with Beijing's recent efforts to cool the economy, "it's quite possible that non-performing loans will increase a little this year and next." But he said banks have now become more cautious in lending and that they are working hard to reduce both their total amount of bad debts and their NPL ratios. Chinese authorities have over the last year sought to rein in investments in such sectors as property development, construction and steel.

Mr. Han said there are likely to be more banking deals with foreign investors in the pipeline. Industrial and Commercial Bank of China is currently in negotiations with potential foreign partners, as are Huaxia Bank and Guangdong Development Bank. He said Huaxia could announce a deal soon, but declined to provide details.

He said the government has yet to set a timetable for reforming the last of the Big Four commercial banks, Agriculture Bank of China, despite the fact that some potential foreign investors have expressed interest in it. The International Monetary Fund in its annual report on China this week called on Beijing to restructure the agricultural bank.

Regulators are currently conducting feasibility studies on how to overhaul the bank, and the government "hopefully will do a capital injection," Mr. Han said. But "for ABC, we have a large amount of non-performing loans to be resolved," he said. The bank said its NPL ratio last year was 26.7%, compared to less than 5% each for the other Big Four banks.


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