The Hindu Business Line : Playing the capitalist game

The Government of China has been playing a significant role in the capital markets of the West, as recent moves testify. The Chinese invasion of London finance has begun.

S. Venkitaramanan

Sovereign Wealth Funds, arising from Asian and other surpluses, have been a defining feature of the international scene in recent years. Starting with Singapore’s Temasek, China, South Korea, Taiwan and Japan have also set up special purpose vehicles into which they have parked some or all of the forex reserves running into billions of dollars.

These funds have been customarily invested in debt instruments. Now, they have decided to shift to securities other than debt securities of the US Government and the European States. This means there has been a tremendous upsurge of funds flooding into the stock market. This is apart from the hedge funds and private equity resources, which are already large. The latest development in the Sovereign Wealth Funds market has led to an intriguing turn of events, wherein the Government of China has been playing a significant role in the capital markets of the West. There is a shift of dominance from the West to the East. This article discusses a recent episode that signifies this transformation. In the complex ideological evolution of Communism, the veterans have always given pride of place in their hierarchy of “dangerous” categories to finance capital, which term embraced stock markets and investment banks. They have identified finance capital as the vehicle of imperialism called by Lenin, the last stage of capitalism. It is, therefore, intriguing to see the emergence of China’s State-led financial institutions as important players — particularly in the takeover battles that mark the financial scene in respect of international banks.

The acquisition of stake in leading private equity firm Blackstone of the US prior to its issue of a large-sized initial public offering was an historic event, which marked the emergence of Communist China as a player in the international financial scene.

The latest is the offer of the State-owned China Development Bank (CDB) to take an equity stake to the extent of $1.1 billion in the revered British icon – Barclays Bank, which had solicited such an infusion of funds to help it in its battle to acquire Dutch Bank ABN Amro. This episode demonstrates the growing power of China’s finance in the international scene. In effect, it is China’s version of Tata Steel acquiring Corus — except that it is financed out of China’s own reserves.

Sovereign Wealth Funds

The episode also marks the emergence of Sovereign Wealth Funds. As mentioned already, these are becoming significant players in the financial markets in search of adequate returns. Barclays Bank, in its search for funds to match the offer of its British rival, the Royal Bank of Scotland, has also roped in Singapore’s Temasek, which has also come forward to take a stake in Barclays. This infusion of funds in a British Bank from Sovereign Wealth Funds is an interesting twist in the game of State ownership versus private dominance in international finance.

The emergence of dedicated investment funds in Asia from China to Japan to Korea and their starting to play a vital role in the stock markets of the world has just now begun. The ongoing controversy about Barclays only illustrates that there is potential conflict ahead. But the Chinese know how to play the game. They have been advised in this transaction by the British arm of Blackstone – a firm in which they have now a stake. They have ‘covered’, so to say, all the important sources of potential regulatory objections. Blackstone Britain is a well-networked entity and its CEO has a good working relationship with many powerful people, including top regulators in Britain. The deal should, by all reports, get cleared.

The emergence of CDB as an investor in the financial markets of London and Amsterdam gives the lie to the thesis that public sector banks are per se not innovative. The CDB is a classic case of a policy bank — set up and run by the Chinese Government to finance China’s government industries and Provinces – turning into a sophisticated player in the international financial scene.

The Chinese have obviously not listened to the siren voices of people such as Mr Percy Mistry, Chairman of India’s High-Powered Expert Group on Mumbai as International Financial Centre. He had recommended that for our banking system to be efficient, the State-holding in all commercial banks should be brought below 49 per cent.

In contrast, CDB is 100 per cent owned by the Chinese State and is still innovative, efficient and well-regarded. So much for the advice, which China does not heed. On the contrary, it uses its state-owned bank to take over an established International Financial Centre, in this case London and Amsterdam. This is in addition to Hong Kong and Shanghai.

New power centre

The international press has rightly been curious about the working of this new hegemon of international finance, China Development Bank. A recent despatch in the Asian Wall Street Journal points to its dynamic leader, Mr Chen R 12; who is himself the son of one of the leaders of the Chinese Communist revolution, Gen Chen Yun, who was included in the Revolution’s eight immortals, such as Mao Ze Dung and Chou en Lai.

Mr Chen, as leader of the China Development Bank, has built up an effective management structure and shown impressive operating results. He has been running a tight ship. The CDB has recorded low non-performing assets, less than 8.68 per cent of the total lending. Its profits in the latest year were 1.10 per cent on assets and 17 per cent on equity, making it more profitable than some of China’s commercial banks.

True competition

The sheer size of CDB is impressive. It has a loan book of nearly 1.9 trillion yuan. Incidentally, while it can raise debt internally, it has also got access to the foreign bond market. An impressive showing for a State-run Bank, which makes its bow in the international financial scene! The Sovereign Wealth Funds of China cannot wish for a better messenger for its good tidings to the London financial market. As a perceptive observer said writing in the Financial Times recently, the Barclays episode is as simple as CDB — meaning China Development Bank is the answer to Barclays’ problems. China has landed together with its cousin Singapore in London. The Chinese invasion of London finance has begun.

A lesson from all this for the RBI! The RBI has to look at our own banks’ forays into the international scene with a kindly eye. these banks need so many clearances to open even an office abroad, let alone take equity in an enterprise elsewhere. Will the RBI learn to allow its banks the same freedom as the People’s Bank of China allows the likes of CBD? Only then will India emerge as a true competitor to China. The RBI has to learn to allow banks and FIs the freedom to innovate on the international scene. That is CDB’s lesson for us.

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