Is It a Must for State-Owned Commercial Banks to Introduce Overseas Strategic Investors?

Report on the IPO of State-Owned Commercial Banks
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Sun Lingyan, Journalist of Financial News

 

Bank of Communications made its strong IPO debut in Hong Kong. And China Construction Bank signed its definitive agreements on strategic investment and cooperation with the Bank of America and Temasek Holdings. We can see that state-run commercial banks have sped up their pace to go public and entered the count-down phase.

Our journalists found some questions that puzzled common people and even some officials working in banks when they made interviews with insiders. And all these questions are in the spotlight but cannot be answered easily and exactly. For instance, is it a must for domestic banks to introduce overseas strategic investors? Why must go to offshore capital market to get listed? When is the right time? And how to guarantee individual investors benefits in the national securities market.

OReport on the IPO of State-Owned Commercial Banks will discuss all questions above to gain an insight into the restructuring program and IPO of state-run commercial banks so that we can get more confidence in this shareholding reform.

Pursuant to the requirement of national banking regulatory authorities, state-owned commercial banks shall invite overseas strategic investors when they go public. And the introduction of overseas strategic investors is a sophisticated process and involves a wide range of preparation works. Among these, state-run commercial banks shall sell certain portion of shares to overseas strategic investors. Some people can not understand why. If only with the joining of the domestic companies, it is impossible for the banks to improve their corporate governance framework, isn’t it?

As for this, Assistant President of China Construction Bank (CCB) Fan Yifei who participated in its whole process of negotiations with overseas investors gave a precise answer when he received our interview. He said the introduction of overseas strategic investors has a definite price tag. That is to say we shall sell certain portion of shares to them. Yet obviously benefits are there. It is a fair trade. Taking CCB as an example. From the very beginning of the process to introduce overseas strategic investors, CCB invited investors to participate in the negotiation process and through their competition choose the one that gave the best price. After experiencing the difficult talks, CCB and the chosen one settled the final price. And through this kind of win-win negotiation, the result is fair for both sides.

We must take this step. But why? Fan Yifei answered this question from four aspects. First of all and most importantly, the introduction of overseas strategic investors will definitely be beneficial to the improvement of corporate governance. He said frankly, since the incorporation of China Construction Bank Corporation, the corporate governance has been enhanced substantially. And without doubt, we still need to learn best practices from the experienced international leading banks in terms of corporate governance. In China, the shareholding system is a brand-new thing while the western countries enjoy a long development history in this regard. All parties that have involved in this process, therefore, need to learn how to establish a modern commercial bank and refer to lessons accumulated from the past. Introducing foreign strategic investors, especially the top financial groups with the advanced corporate governance framework, experienced management expertise and sound performance, can help us progress in a faster manner. So we can see that there is the need for us to introduce overseas investors during this period when state-run commercial banks undergo the process of improving the corporate governance system.

Secondly, state-owned commercial banks can strengthen and enhance their management mechanism and incentive system through introducing foreign investors. Fan Yifei pointed out, as the old saying goes ‘Lookers-on see more than players.’ As to domestic companies, they are accustomed to those issues with common features, and therefore, cannot see them clearly. Yet it is easier for foreigners to find out the disadvantages. Thus, overseas strategic investors can assist us to strengthen the management mechanism and accelerate the process of improvement. CCB purchased lots of organizations and facilities in the past when there was no the requirement to go through all procedures of getting the property right. However, if you want to take the shareholding reform, the first step is to make the ownership clear and have the property right. In particular when you confront the due diligence, all shortcomings are unveiled and this will urge you to complete all procedures left and enhance the management mechanism. That is to say, the criteria for our work and the requirement for our management have been raised. Of course, this will spur us to take efforts in transforming our banks into a modern commercial bank that can compete in the international market.

　　Thirdly, it will also help banks to improve the development of products and technology. Our financial market is still underdeveloped and banking services cannot meet all needs from customers. Banks have insufficient momentum to innovate products and services for the long term of financial control on the one hand. And on the other hand, banks are incapable of developing all new products. Financial products and services are still needed to be diversified and developed. And some fields are yet waited to be probed into. Thus in this regard, foreign investors can effectively and efficiently help us.

Fourthly, the introduction of overseas strategic investors can make the successful IPO easier. With the joining of foreign investors, the confidence to our state-run commercial banks and even China’s banking development shall be improved in the international capital market, and meanwhile, the investment value of the listed banks will also be enhanced.

Fan Yifei said, during negations CCB always insisted on its key and exclusive standard that is to maximize the benefit and value of the nation and CCB. CCB will absolutely learn many lessons and experiences from overseas strategic investors. And CCB will receive more benefits from these.

President of Bank of China (BOC) Li Lihui said they want to introduce real strategic partners who can assist the bank to improve the management system. In other words, BOC wants partners that can favor its development and exert positive impact on it in the field of management, products and services. BOC has transformed itself into a shareholding commercial bank, yet still has a lot of work to do in terms of marketing, human resources and mechanism changes. In particular BOC hopes that it can get advanced mechanism, expertise and professionals through introducing strategic investors so that it can make its IPO successful.

Analysis from the management of CCB and BOC demonstrates that state-run commercial banks need to put more efforts in the restructuring program. Thus, the introduction of strategic investors will facilitate the transformation of state-owned commercial banks and change the present shareholding structure. State-owned commercial banks can, therefore, go public successfully and improve their image in both domestic and overseas markets.

　As for state-run commercial banks, it is the first time to probe into this field. Yet, there are some practitioners. In 1996, Asia Development Bank bought stakes in Everbright Bank that became the first Chinese bank to receive foreign capital and introduce overseas strategic investors. At the end of December, 2001, HSBC purchased an 8% stake in Shanghai Bank, and International Finance Corporation lifted its 5% stake to 7% in Shanghai Bank. In the January of 2003, Citigroup declared they would buy a 5% stake in Shanghai Pudong Development Bank for RMB 600 million, with an option to raise the stake. And then, International Finance Corporation, Temasek Holdings and Hang Seng Bank entered in it one by one. In August of 2004, HSBC purchased a 19.9% stake in Bank of Communications for RMB 14.461 billion. After that, Newbridge Capital LLC, ING Group, and Commonwealth Bank of Australia began to enter into the market and became the largest shareholders. Just days ago, CCB signed a definite agreement with the Bank of America that would make the initial investment of US$ 2.5 billion in CCB and with an option to raise its stake to 19.9％.

In accordance with the statistics of China Banking Regulatory Commission (CBRC), so far there have been 10 China’s banks that successively received the investment from Citigroup, HSBC and other foreign financial institutions. By the end of last year, the total volume of foreign investment in China’s banking sector had reached US$ 3.186 billion. As a matter of fact, Bank of Communications, Shanghai Bank, Shanghai Pudong Development Bank and other China’s banks have improved their operations and performance in board of directors, risk management, marketing and all line of businesses through introducing overseas strategic investors.

Chairman of CBRC Liu Mingkang said, the introduction of foreign institutions is not only to get foreign investment, but also and importantly, is to learn their advanced skills and knowledge, so that the reform in China’s banking sector can be promoted in a better way.

And at the same time, foreign investors also hope that they can integrate their advantages into China’s strong points in addition to a good investment return. In this way, they can get more opportunities to develop themselves.

And all people involved are confident in the future win-win situation. And also challenges are there to wait for both domestic banks and foreign financial institutions to realize long term cooperation and common development.

From Financial News