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October 19, 2005
Investing in China's banks
The China Economic Quarterly, always a good read, has several interesting articles in its latest edition. Over the next few days I'll post some excerpts of some of the more interesting pieces. One makes some telling points on the recent strategic investments in some of the big state owned banks:
The three biggest Chinese banks now all have their foreign dance partners. Herewith a few random thoughts inspired by this orgy of risk-taking:As far as I'm aware, retail investors in CCB's IPO don't qualify for these puts.
Victor Shih says perhaps these investors don't have puts, rather a guarantee re book values.posted by Simon on 10.19.05 at 06:50 PM in the China economy category.
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Very simple. Remember during the internet boom when pre-IPO internet companies signed on "prestigious" names to sit on their boards, in return for options? Looks like the same deal to me. Western banks prostitute their reputations in return for a piece of the IPO proceeds, and bolster investor confidence in Chinese banking institutions that have done nothing to deserve investor confidence. Some saps in these Western banks may actually believe they'll access some sort of long term benefit and guarantee their guanxi status forever by shacking up with all the key princelings, etc. In any case, somebody will be left holding the bag - Chinese depositors, taxpayers, and probably foreign investors too. Real estate agents in America/Canda/Australia probably can't wait to sell mansions to the soon-to-be Chinese Bank IPO millionaires looking for a safe place to stash their cash.posted by: A.West on 10.19.05 at 09:18 PM [permalink]
Gordon Chang is wrong.
In the Coming Collapse of China, he argued that WTO regulations would cause money to flow out of the Chinese banking system into Western banks. The money is clearly flowing in the opposite direction.
Also, it's not "guanxi" or "princelings" that the Western banks are after. Western companies are perfectly able to develop guanxi on their own. Also, the princelings were pretty much wiped out in the late-1990's.
It's the branch network that Western banks are after. A western bank can conceivably create its own branch in the really big cities, but try opening up a branch in a small town in the middle of nowhere where there are more chickens than people. $49 million to start a branch there????
posted by: Joseph Wang on 10.19.05 at 10:43 PM [permalink]