Mud and markets on the mainland

IFR Asia 863 - September 27, 2014
6 min read
Asia

Timothy Sifert

Timothy Sifert_ifraweb

Timothy Sifert

It was something of a relief last week when a senior banker, in the company of journalists, likened the liberalisation of China’s financial markets to throwing mud against the wall – if it sticks, it sticks.

It was a relief because it was so honest, and because the metaphor seemed so much closer to the reality than what many other senior dealmakers in the region would have anyone believe. His comment specifically addressed the many pilot schemes and other programmes Chinese authorities have launched in recent years, with mixed results, but could just as easily apply to the way foreign banks look to expand the business in the Middle Kingdom.

When it comes to China, banks are willing give many things (within reason) a try if it gets them in the good graces of the country’s economic leadership. One or another PRC regulator suggests a new scheme aimed at making the world’s second-largest economy more open, and as long as the price is right, banks line up to participate, no matter what they really think about the viability of the plan, because it just might work. They don’t know.

So, the number of foreign banks that publically endorse a given pilot scheme – and one initiative on 28-sq km of land in Shanghai comes to mind – might not really be indicative of its success or even of the level of real interest the supporting firms have for it. It’s just a number.

The banker subsequently refined his China-banking metaphor, talking of paint, instead of mud, and a canvas, instead of a wall. But the initial image stuck, as it were.

IT’S DIFFICULT TO argue with any mainland strategy that allows an offshore institution to engage with the country’s hard-to-know institutions, as they often do in these pilot schemes and other programmes. They gain insight into what regulators are thinking, and that knowledge is hard to put a price on.

Also, if the PRC works as businessmen say it does, watchdogs there can be expected to repay banks that are willing to take risks in their under-developed market with concessions, like faster approvals. It’s supposed to be about relationships, and this is a good way to forge stronger ones, even if it’s difficult to quantify those gains in dollars – or in renminbi.

Still, it is a strategy fraught with frustration. The rules governing many of the most popularly received China financial programmes are often opaque and convoluted. They can also be just as prohibitive as they are inviting.

A banker might hail the China Banking Regulatory Commission’s decision this month to allow international banks to apply to open more branches and issue local bank capital as ”transformational”. But, upon closer inspection, not much has changed. A foreign bank still has to wait three years – an eternity, really – before it can do business in renminbi.

And the 75% loan-to-deposit ratio foreign and local banks have to comply with is still just as much of a burden as it’s always been, even if it’s one of a few rules authorities are considering relaxing to stimulate the economy.

Although the financial benefits might not be immediately obvious, however, it may still make sense for a big global lender to open a few more branches and, as long as the price is right, issue some bank capital. Doing so may put them it better position than other banks whenever China does fully open its markets to external competition.

THE GOVERNMENT’S DESIRE to reform state-owned enterprises and make them more competitive locally and internationally has also caused some excitement. Plans include hiving off non-core businesses and welcoming more private capital into the public sector, two moves that could yield new M&A, spin-off and fundraising fees for international financial institutions.

Yet, at the same time, the Chinese government is also clamping down on corruption at SOEs, including some of those it is pledging to open up to foreign investors. Campaigns against corruption are not essentially at odds with SOE reform. But the unpredictability of the corruption crackdown is making executives reluctant – even scared – to take action.

Perhaps the two most celebrated of China’s recent initiatives are the Shanghai-Hong Kong Stock Connect and the Shanghai Free Trade Zone. Few people, if any, know exactly when the stock connect scheme will launch, and the free trade zone has been open for over a year with little sign of any benefit for the banks that opened offices there.

That is why the seemingly random China strategy prevails, even if so few top dealmakers dare describe it as such.

It’s also amusing to entertain just how haphazard and opportunistic these business ventures might be, especially given the number of times banks describe them as “pivotal”, “transformational”, or “vital to our global connectivity”.

Yet, a lot of progress and money has been made. And looking at the market opportunities on offer to foreign institutions, it’s hard to argue with the strategy of throwing mud, paint or whatever’s at hand. At least there’s some forward momentum.

Timothy Sifert_ifraweb