First it was Chinese oil giant PetroChina buying Xinjiang-based Kunlun Bank. Then telecomprovider China Mobile said it was spending over $5.8 billion on Shanghai Pudong Development Bank. Now Legend Holdings – parent company to Lenovo – is also developing a footprint in the country’s financial services industry.
In January, the Beijing Times reported that Legend had closed a deal with central China’s Wuhan-based Hankou Bank to become its largest shareholder. Regulators approved the deal this month. But Legend has also announced that it has bought a 12% stake in medium-sized brokerage BOC International. BOC International is a joint venture between a Hong Kong unit of Bank of China and five Chinese state-run companies. The Shanghai-based brokerage has been active recently in several high-profile initial public offerings, including Russian company Rusal’s $2.2 billion IPO.
The two deals – valued at a combined Rmb2 billion – seem to suggest that Legend has plans in the financial sector, one of the five areas that it has declared to be priorities for investment.
In September, Legend chairman Liu Chuanzhi announced Rmb10 billion ($1.5 billion) of investment over five years in five fields: clean energy, new materials, technology, financial services and industries related to Chinese domestic consumption. In addition to PC-and- phonemaker Lenovo, Legend also owns a private-equity unit, Hony Capital; venture capital firm Legend Capital; and a property outfit, Raycom Real Estate Development.
While the idea of industrial companies investing in banks may seem odd to outsiders, the trend is here to stay in China (see WiC45). Zhang Ruimin, chairman of Haier Group, the country’s largest home appliance maker, is another advocate. Zhang recently told the China Business News that industrial-financial alliances are an important strategic choice. Haier, too, has its own banking arm.
But the ‘findustrial’ trend is making some industry observers nervous. Lu Lei, chief economist for United Securities, told Caijing magazine that combining industrial companies and financial firms carries risk. That’s because bosses might be tempted to dip into banking balance sheets to fund their expansion plans, encouraging them to take bigger risks. If the investments turn sour, the banks are then overexposed.
Liu maintains that Legend’s interest in Hankou Bank is strategic and that it won’t get involved in day-to-day operations. In fact, it plans to bring additional capital into Hankou, supporting its expansion beyond the current 80 branches and also using its relationships to add corporate accounts. Liu says that a listing is planned.
Insurance firms have also jumped on the bank-buying bandwagon. Ping An Insurance, China’s second largest insurance firm, recently bought $1.5 billion worth of new shares issued by Shenzhen Development Bank.
The regulators, however, don’t seem too keen. Following the Ping An deal, the Chinese Insurance Regulatory Commission (CIRC) announced that it has capped the investment limit for insurance companies in non-insurance financial companies (i.e. banks) at 30% of their consolidated net assets. “We will come out with more detailed rules,” says Cai Jipu, deputy director of CIRC, who worries about the contagion risk that might arise from banks and insurers merging.
The CIRC’s policy might see the big banks and large insurers holding back on forming major partnerships in the near term, says 21CN Business Herald. But by the end of 2009, the consolidated net assets of the country’s eight insurance companies stood at Rmb321 billion. So, even under the new rule, as much as Rmb96 billion could go on buying up stakes in banks. Whether regulators like it or not, China’s financial landscape is set for blistering change.
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