China’s Banking Revolution

One of the greatest challenges China must confront before the WTO treaty enters into force in 2007 is to prepare the country’s banking system for privatization and competition with foreign banks. The government has established a new agency, Central Hujin Investment Company, to manage and re-capitalize big state-owned banks before they are sold. Hujin has already injected $60 billion of China’s foreign-exchange reserves into the Bank of China, the China Construction Bank, and the Industrial and Commercial Bank. The Agricultural Bank will also require new capital, although the government is not yet preparing it for privatization.

The government’s rescue policies appear to be working. During the past two months, Bank of America has announced a $2.5 billion investment in return for a 9% stake in the China Construction Bank, and The Singapore-based holding company Temasek paid $1.4bn for a 5.1% stake in China Construction Bank. The Royal Bank of Scotland is leading an investment group that will invest $3.1 billion more in the Bank of China, while Goldman Sachs and Germany’s Allianz are close to an agreement to acquire a 9.9% stake in the Industrial and Commercial Bank for a similar sum.

The government hopes that these foreign investments will set the stage for the banks to go public on stock exchanges in Hong Kong and elsewhere during 2006, whereas foreign banks are investing with an eye to penetrating the enormous Chinese market. The big three state-owned banks have vast branch networks and employ hundreds of thousands of people. Foreign banks could never hope to achieve such comprehensive coverage without a local partner. They will focus initially on sectors such as credit cards but could develop other joint ventures. HSBC also announced a major investment in Ping An Insurance, which could set the stage for experiments with Bancassurance in the future. 

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