Banks exercise caution

China's banking sector has weathered the global financial crisis because it does not have wide exposure abroad. The Chinese banking sector should continue to expand overseas during this critical time, but exercise caution in either opening branches or mergers and acquisitions abroad.

In a bid to boost their ailing financial sectors, some countries are loosening restraints and providing market access to foreign banks. For example, the US Federal Reserve gave the green light to China Merchants Bank, the Industrial and Commercial Bank of China and the Construction Bank of China to establish branches in New York.

This may be a propitious time to expand overseas, but Chinese banks should wait for signs that the global economy is bottoming out. Large scale trans-national mergers usually come after the end of a recession. At that time, Chinese banks with their ample funds will have better opportunities.

We should give priority to countries with a similar culture, values and legal environment as China to accumulate experience in the overseas market before seeking further expansion in other areas.

Based on the lessons of China Investment Company's (CIC) investment in Black Stone, in which CIC suffered great losses, Chinese banks should also obtain voting rights or a board chair in companies that they invest in overseas.

Past experience indicates that in the process of restructuring and getting listed, Chinese banks have paid a big price for only limited use of a foreign bank's experience in corporate governance, risk management and product innovation.

In the meantime, foreign banks are expected to speed up their penetration in the Chinese market once the crisis is over. When that happens, Chinese banks should be prepared for a fierce competition at home.

China Business News

(China Daily 03/09/2009 page2)