Scotland Going Back Into China
The Royal Bank of Scotland is apparently contemplating an investment of up to $4bn for a 20% stake in Bank of China (which is the #2 or #3 bank in China), according to a story in today's FT. Under Chinese law, foreign investors can't own more than 20% of a Chinese bank, so they're ponying up for as much as they're allowed to.
The Chinese banking system is a bit of a mess. Under the strict central control of the Chinese Communist Party, the banks have apparently made loans to over 170,000 SOEs (State-Owned Enterprises, as opposed to the rather amusingly named SOBs or State-Owned Banks). Not surprisingly, that has resulted in enormous losses over the years, since the banks have been lending based on central policy (and, no doubt, bribery) rather than on economic merit. It's reckoned that non-performing loans in China's roughly $4 trillion portfolio of bank assets have been in the hundreds of billions.
On top of the bad loans, there's a very distinct smell of corruption. The Chairman of the China Construction Bank (CCB), another of the so-called "Big Four", recently resigned after being accused of taking a $1mm bribe. (This came to light when a Chinese company filed in California court against an American IT company, Alltell Information Services, which it accused of reneging on a deal to pay it a commission. Alltell is accused of paying the $1mm to the bank chief, as well as a trip to Pebble Beach and his son's school fees, to kill this deal -- the broker's lot is not always a happy one, to be sure). The previous chairman of the same bank is already in jail for taking bribes while head of the Bank of China. The corruption isn't only at the top, evidently: the manager of a sub-branch of BoC has gone missing along with $120mm; several senior staff of the same bank were found to have loaned $78mm to a property developer using fake documents; a group of staff at CCB is accused of making off with $14mm in 98 separate scams; a lone typist at the bank's Dalian branch is accused of embezzling $6mm over the years to feed his gambling habit. It looks pretty much as though baksheesh is endemic in the banking system -- and you can probably extrapolate that to the economy as a whole.
The authorities want to take its banks public. The reasoning behind the decision is good: with the discipline of public ownership, these banks will have to get their act together. And they need to get their act together by 2006, when, under an agreement with the WTO, foreign banks will be allowed in to compete. But it's not an easy proposition after this kind of publicity. It doesn't help, either, that other IPOs of state owned enterprises have performed very badly in the aftermarket -- mainly because managements have, effectively, walked off with the proceeds. The Chinese government has so far had to inject $45bn into the two big IPO candidates (CCB and BoC) to make their balance sheets acceptable to potential investors.
Who would want to invest in this mess? Well, just about every international bank, apparently. ING, the Dutch financial group that mopped up Barings after the Nicholas Leeson debacle 10 years ago, is buying up to 19.9% of Bank of Beijing (along with 5% to be taken up by IFC, the World Bank's private equity sub). And there are plenty of rivals lined up alongside RBS for a piece of BoC, or any other bank that comes up for grabs. Not hard to see why: those 1.3bn Chinese, and the (apparently, anyway) booming Chinese economy (now, at something like $1.5 trillion, overtaking France to be the 5th largest in the world after the US [$11], Japan [$4.5], Germany [$2.5] and the UK [$1.9] ).
On an apparently unrelated matter: Khordorkovsky made a defiant closing speech at his trial in Russia for embezzlement, fraud and tax evasion. K probably stole Yukos in the early 1990s when Russia's state assets were "privatized" -- sort of like China's are being now. It's reckoned "the oligarchs" got a lot of prime stuff very cheap under Yeltsin. Putin has been clawing the assets back -- first the media companies, then the oil and gas. K was very high profile in his opposition to Putin, so they're making an example of him. Meanwhile, they've pretty much grabbed back Yukos by burying it under tax claims (the amount of the claims, apparently, aren't far short of total revenues, so they look pretty bogus). Although some western investors have continued pouring money in despite this apparent disregard for property laws, it has scared, net net, about $9.5bn out of the country. An object lesson, I would think, for RBS.
The Chinese banking system is a bit of a mess. Under the strict central control of the Chinese Communist Party, the banks have apparently made loans to over 170,000 SOEs (State-Owned Enterprises, as opposed to the rather amusingly named SOBs or State-Owned Banks). Not surprisingly, that has resulted in enormous losses over the years, since the banks have been lending based on central policy (and, no doubt, bribery) rather than on economic merit. It's reckoned that non-performing loans in China's roughly $4 trillion portfolio of bank assets have been in the hundreds of billions.
On top of the bad loans, there's a very distinct smell of corruption. The Chairman of the China Construction Bank (CCB), another of the so-called "Big Four", recently resigned after being accused of taking a $1mm bribe. (This came to light when a Chinese company filed in California court against an American IT company, Alltell Information Services, which it accused of reneging on a deal to pay it a commission. Alltell is accused of paying the $1mm to the bank chief, as well as a trip to Pebble Beach and his son's school fees, to kill this deal -- the broker's lot is not always a happy one, to be sure). The previous chairman of the same bank is already in jail for taking bribes while head of the Bank of China. The corruption isn't only at the top, evidently: the manager of a sub-branch of BoC has gone missing along with $120mm; several senior staff of the same bank were found to have loaned $78mm to a property developer using fake documents; a group of staff at CCB is accused of making off with $14mm in 98 separate scams; a lone typist at the bank's Dalian branch is accused of embezzling $6mm over the years to feed his gambling habit. It looks pretty much as though baksheesh is endemic in the banking system -- and you can probably extrapolate that to the economy as a whole.
The authorities want to take its banks public. The reasoning behind the decision is good: with the discipline of public ownership, these banks will have to get their act together. And they need to get their act together by 2006, when, under an agreement with the WTO, foreign banks will be allowed in to compete. But it's not an easy proposition after this kind of publicity. It doesn't help, either, that other IPOs of state owned enterprises have performed very badly in the aftermarket -- mainly because managements have, effectively, walked off with the proceeds. The Chinese government has so far had to inject $45bn into the two big IPO candidates (CCB and BoC) to make their balance sheets acceptable to potential investors.
Who would want to invest in this mess? Well, just about every international bank, apparently. ING, the Dutch financial group that mopped up Barings after the Nicholas Leeson debacle 10 years ago, is buying up to 19.9% of Bank of Beijing (along with 5% to be taken up by IFC, the World Bank's private equity sub). And there are plenty of rivals lined up alongside RBS for a piece of BoC, or any other bank that comes up for grabs. Not hard to see why: those 1.3bn Chinese, and the (apparently, anyway) booming Chinese economy (now, at something like $1.5 trillion, overtaking France to be the 5th largest in the world after the US [$11], Japan [$4.5], Germany [$2.5] and the UK [$1.9] ).
On an apparently unrelated matter: Khordorkovsky made a defiant closing speech at his trial in Russia for embezzlement, fraud and tax evasion. K probably stole Yukos in the early 1990s when Russia's state assets were "privatized" -- sort of like China's are being now. It's reckoned "the oligarchs" got a lot of prime stuff very cheap under Yeltsin. Putin has been clawing the assets back -- first the media companies, then the oil and gas. K was very high profile in his opposition to Putin, so they're making an example of him. Meanwhile, they've pretty much grabbed back Yukos by burying it under tax claims (the amount of the claims, apparently, aren't far short of total revenues, so they look pretty bogus). Although some western investors have continued pouring money in despite this apparent disregard for property laws, it has scared, net net, about $9.5bn out of the country. An object lesson, I would think, for RBS.
posted by econoclast at 8:36 PM
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