China News: Chinese banks absorbing huge foreign capital
A recent report released by Lehman Brothers proposes that China's banks are in the process of receiving huge foreign capital infusion. Although this represents considerable risks for both sides, the final outcome can be a win-win situation for all.
Statistics provided by Lehman Brothers show that global investors have reacted very favorably to the foreign capital needs of China's banking industry. In the past eighteen months, foreign investors have invested a total of US$17 billion in Chinese banks, US$13 billion alone in the last four months.
The report also says that due to the huge supply of funds by China's state-owned commercial banks to domestic investors, many industries have developed phenomena of oversupply. There is a 25% chance of China's economic growth rate decelerating as well as an increase in the risk of a rebound in bad debt.
The report points out that high-risk investment demands higher returns. According to WTO agreements, China will open its banking industry by the end of 2006 to complete foreign participation and competition. Although the potential growth in deposits is limited, the growth in banking services for individuals (such as mortgage lending and credit card loans) in China is shockingly high. At present, China Banking Regulatory Commission has granted permission to China Construction Bank to securitize its mortgage loan portfolio and China Development Bank has also received permission to promote asset securitization. This signifies that the Chinese banking industry will be playing an important role in the process of asset securitization.
The report also points out that for investment banks, becoming strategic investors will help them win distribution roles when China's state-owned commercial banks eventually undertake global IPO's. At present, the ratio of China's banks' average share price to its net book value is way below the world's standards. If bank shares rise substantially after the scheduled IPO's, there will be huge profits to be made in the process.
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