Regulator rejects bank sale criticism
By Zhang Dingmin (China Daily)
Updated: 2005-12-06 06:13

A top Chinese banking regulator yesterday said that recent criticism that stakes in the country's banks were being sold too cheaply to foreign investors was unfair.

Liu Mingkang, chairman of the China Banking Regulatory Commission (CBRC), said foreign strategic investors were improving the competitiveness of the banking sector before more competition was introduced.

"The prices so far were all higher than the book value so we don't think the stakes have been sold too cheaply," the official told reporters at a briefing.

Chinese authorities have been encouraging banks to look for foreign investors, hoping their expertise and experience can help bridge the gap between China's banking sector and their international competitors.

Foreign banks are increasingly opting for equity investment as an effective way of penetrating the local market.

According to a PricewaterhouseCoopers report released in September, partnerships with a local bank ranked as the second most favoured way of getting into the market, after organic growth, among the 35 foreign banks operating in China.

By the end of October, 22 foreign investors, such as the Bank of America, had invested a combined US$16.5 billion in 17 Chinese banks, accounting for 15 per cent of total banking capital, CBRC statistics indicate.

But the prices paid for these stakes have been criticised recently by some analysts, who complain the shares are being sold too cheaply to foreign strategic investors as well as public investors during initial public offerings (IPOs).

Sceptics say the prices should have been higher if the sellers' brand names, networks and customer bases had been taken into account; others say such factors as low profitability, poor asset quality and weak corporate governance justifies the discounts.

Liu yesterday defended the current price levels, underlining the expected contribution these foreign investors would make, and the potential risks they are taking.

The purpose of encouraging these investors is to diversify the banks' shareholder structure and reduce their reliance on State coffers, as well as to improve their competitiveness through partnerships, he said.

He added there are strict criteria to ensure investors do their job, including a minimum investment requirement of 5 per cent, a three-year minimum partnership period, banking expertise and participation of the foreign investor in the bank's board or management.

"So the likelihood of strategic investors profiting through speculation is very slight. They will have to work hard and improve the banks' performance with their Chinese partners," Liu said.

"All these factors must be considered in terms of pricing."

The official also defended the IPO price for China Construction Bank.

The issue price for the IPO in October was HK$2.35 (29 US cents), representing a price-to-book ratio of 1.96 times. That was among the higher price range for large Chinese State-owned companies that have listed overseas in the last five years, and was even higher than the IPO priced for some European banks, he noted.

"This was an internationally acknowledged successful price level," Liu said.

The appropriateness of the bank's initial selling price was also reflected in the share-price trend for two months following listing, he said. This has risen steadily by 8.5 per cent to HK$2.55 (31 US cents) last week. The issue price is considered too low if the share price rises by more than 30 per cent within two months, but too high if it falls below the issue price.

"This demonstrated that we are properly priced, not overpriced or under-priced," Liu said.

The official also dismissed worries that the listings, which raised huge amounts of cash, would give Chinese banks fresh impetus to increase hasty lending.

Stricter supervision, the constraint of capital adequacy requirements and enhanced risk management at the banks make it unlikely that they will start lending blindly again as they did in the past, he said.

(China Daily 12/06/2005 page9)