Banking & Finance

Ever more bright

Foreign strategic investors – who needs them?

Ever more bright

Everbright Bank is set to IPO

The Chinese banking sector is a strange beast. At one end of the scale you have ICBC, which has become the world’s biggest bank by market capitalisation. At the other end you have the predicament of Li Jun. According to the Guangzhou Daily, a bank in Dongguan (its identity is not reported), refused Li a bank account. The reason? The bank said it had stopped opening accounts for people called Li Jun. It claimed the name was too common and it already had 300 Li Juns as account holders.

The newspaper said Li was consulting his lawyers.

Somewhat less bizarre is recent news about Everbright Bank. Everbright has made clear it wants to IPO in Shanghai – “the bank is sparing no effort to prepare for a public listing,” it revealed – and got the nod to receive fresh capital from eight investors this week.

The investors are a diverse bunch: China Reinsurance Corporation, Baosteel, China Electric Finance, Shenergy Group, Space Group, Shanghai Chengtou Corporation and Guangdong Freeway. But the placement raised Rmb11.5 billion ($1.7 billion), taking Everbright’s capital adequacy ratio to 10% – a requirement for listing approval.

The news marks a significant break with past practice too. When state-linked banks have readied for their IPOs previously, it was de rigeur to have foreign strategic shareholders come in as pre-IPO investors. Ergo: Bank of China sold stakes to RBS and UBS, while Bank of America bought a strategic stake in China Construction Bank.

To Chinese eyes that line-up of ‘sophisticated’ foreign investors now looks almost laughable. Indeed, while the foreign firms were supposed to help the Chinese banks – by dint of their overseas expertise – paradoxically it is the Chinese banks that have ended up helping them. Humbled by the 2008 financial crisis the foreign strategic shareholders were suddenly forced to become a lot less long term – and were compelled to sell all or part of their stakes to shore up their own devastated capital bases.

This lesson was not lost on Chinese policymakers. Everbright’s ‘strategic investors’ hence signal a new era – one in which foreign strategic investment seems to be regarded as less important. With arguments about the importing of expertise now rendered somewhat redundant, the preferred route is to round up domestic ‘strategics’ instead.

In Everbright’s case, the key investor seems to be China Reinsurance Group – the largest reinsurer in Asia, and the fifth biggest in the world. It has bought a 4.5% stake in Everbright.

Likewise, it has been indicated that another insurer – China Life – will most likely take a pre-IPO stake in Agricultural Bank ahead of its mega-offering (see WiC1).

“These banks wants insurers to become shareholders because they tend to hold for the long term,” Ping An Securities analyst Shao Ziqin told China Business. “They will not sell shares for short term profit, or cause volatility in the company’s future stock price.”

Unlike foreign ‘strategic’ shareholders, needless to say.

Additionally, these investments form part of a broader trend: insurers and banks getting together as part of a bancassurance strategy. Ping An’s acquisition of a stake in Shenzhen Development Bank is the prime example (see WiC19).

In the case of Everbright, there are additional benefits to its domestic shareholder group too. The bank told China Daily that all the strategics will channel their business through Everbright – including deposits, settlement, lending, cash management and bond issuance. Perhaps the most important in this respect is Baosteel, China’s biggest steelmaker.

All in all it is a landmark deal – albeit a low-key one – in the China development story.

When China was a poor, capital-starved nation foreign investors could walk in and dictate terms. No more, it would seem.

Li Jun, on the other hand, might still argue China’s banks could learn a thing or two from the foreigners: such as how to open accounts for their new customers.

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