Banks sense profit in change
Tuesday, November 5, 2002
biz.scmp.com
MICHAEL FORSYTHE of Bloomberg
For Goldman Sachs Group's China investment-banking team, this month's Communist Party Congress to pick the country's new leaders is more about money than politics.
At the same meeting five years ago, President Jiang Zemin pledged to sell stakes in state companies overseas, enabling Goldman to help arrange US$10.6 billion in share sales for companies including PetroChina - and collect about US$150 million in fees. At the congress starting on Friday, China may go even further.
"We'll see this as a turning point," said Jiang Fan, head of fixed-income research at Goldman Sachs in Hong Kong and a capital-markets lecturer at the Communist Party School in Beijing. "The private sector will be given greater freedom to tap into financial resources both on the equity and bond side."
The new leaders might loosen curbs on private companies and banks in a country where the state still controlled more than half the economy, executives said. China needs to extend the corporate overhaul President Jiang unleashed in 1997 after joining the World Trade Organisation (WTO) last year opened its local companies to a flood of overseas competition.
Private companies need to grow to create jobs for the more than 26 million people fired from state-run companies since 1998 and sustain the fastest economic growth in Asia - China's economy expanded 8.1 per cent in the third quarter from a year earlier.
"China's opening to the world has entered a new stage" since the country joined the WTO, Mr Jiang said at last month's Asia-Pacific Economic Co-operation meeting in Los Cabos, Mexico. "China will broaden its scope of participation in the global economy."
Entrepreneurs say the party may endorse rules letting them sell bonds and shares locally and overseas more easily. That would put them on equal footing with state-owned rivals and generate more business for investment banks such as Goldman Sachs. Foreign banks such as HSBC Holdings and Citibank may also be allowed to invest more freely in Chinese partners.
"Private companies will have more room to grow in the future," said Zhang Hongwei, founder of the Orient Group, which aims to expand its chain of home-improvement stores nationwide to become China's equivalent of Home Depot. "The 16th Party Congress will be a breakthrough."
Mr Zhang - also vice-chairman of China Minsheng Banking, the country's only private lender - said he was counting on party leaders to let him raise money more easily as he competes with rivals such as Wal-Mart Stores, which has 22 outlets in China.
No privately owned Chinese company has sold bonds at home or abroad since before communist rule began in 1949. Last year, Chinese companies sold less than a third as much debt as Portuguese ones, even though China's economy is 12 times bigger than Portugal's.
Philip Tsao, co-head of Asian debt capital markets at UBS Warburg, said he expected decisions made at the congress to help China catch up.
"After the party congress there should be a very quick development," Mr Tsao said. "If there's no debt market, we will not be able to commit resources to this market, which we're very keen to do."
Overseas banks are also eager to sell their services in Asia's second-largest economy by buying stakes in local lenders. Currently, such purchases are approved on a case-by-case basis.
HSBC - the biggest international bank in China and Europe's largest lender by market value - won government approval last December to buy an eight per cent stake in Bank of Shanghai, becoming the first overseas lender to own a stake in a local bank.
US-based Newbridge Capital agreed last month to buy as much as a fifth of Shenzhen Development Bank, taking management control. Newbridge is awaiting government approval for the transaction. "The central bank has made it clear that it welcomes foreign investment in the banking sector," said Andy Rothman, China country head for CLSA Emerging Markets. "I think we'll see local banks learning from that experience."
China is also opening state companies to more outside investment.
The government said on Sunday it had lifted a ban on foreign investors buying non-tradable shares in state-controlled companies, making it easier for international investors to take over their Chinese counterparts.
Under WTO rules, China must allow overseas investors a bigger share of its US$540 billion equity market by 2004. Currently, foreigners cannot buy local-currency shares.
Efforts to draw foreign investors were set back last week, when China Telecom delayed a global share sale worth as much as US$3.68 billion.
The unit of China's biggest fixed-line company has until today to set new terms for the offer, which is being arranged by Morgan Stanley and Merrill Lynch and would be Asia's biggest this year.
Expected changes in China go beyond companies and capital markets. Central bank governor Dai Xianglong has said China would gradually allow its currency - now pegged at 8.3 to the US dollar - to trade more widely. China is considering a "more flexible exchange-rate policy", he said in March, without giving a time-frame.
The central bank, which sets banks' interest rates, has also announced plans to let lenders set their own rates in coming years.
The jury is still out on who will be named to the Politburo Standing Committee, the seven-person group that oversees the party that rules China, at the congress. President Jiang is expected to step down as party leader, a post he has held since 1989, to make way for Vice-President Hu Jintao, 59, who was anointed for the job by former leader Deng Xiaoping. Mr Jiang will stay on as president until March.
Preparations for the congress - which have included 2.5 million workers cleaning streets and planting trees - might slow new policies for now as government officials await the leadership change, analysts said.
"There is a general feeling within the government that this isn't the time for new initiatives," said Chris Murck, chairman of the American Chamber of Commerce in China, which represents more than 600 US companies ranging from General Motors to Motorola.
Analysts expect China's new leaders to start clearing the backlog soon after they take their new jobs.
"The party has bet its future on the private sector," Mr Rothman said. "They are committed to that path, and they will go down that route more quickly." |
