http://www.economist.com/research/artic ... d=12855427IN THEIR darkest moments, global banks can find some solace in the thought that, regardless of how much they are to blame for the world’s financial woes, they remain essential to recovery in America and Europe. Their prospects in China, where an abrupt change in circumstances and mood has taken place during the past year, are much less sure. As in New York and London, lucrative underwriting assignments have disappeared. But in China the crisis is also serving as a superb pretext for hardening regulatory and competitive impediments to all but the state-controlled local financial institutions.
The immediate obstacle, say foreign bankers in China, is a reduction in the credit their operations can receive from Chinese banks (which are all, to a significant extent, controlled by the state). The scarcity of domestic funds is crippling because other rules hold foreign institutions back from injecting capital into their Chinese operations. The role they can play in the public capital markets also remains limited. Despite years of lobbying and some partial approvals, no international bank has gained even the basic right to underwrite and distribute securities on its own.
Making money for a non-Chinese financial institution in this environment means working around the edges. Activities based on economies of scale and tied to cross-border business can still pay their way. Foreign-exchange trading remains lucrative for a handful of global banks, for example. Even in a slump, there is money to be made processing transactions.
Two years ago it was plausible for the big investment banks to believe that this sort of activity would merely augment far richer opportunities that would come from China’s growth and the shift of its financing from the state banks to public markets. In 2006 and 2007 vast profits were made from taking Chinese companies public in Hong Kong—then believed to be a prelude to doing the same in Shanghai and Shenzhen—and from related businesses in brokerage and wealth management, says Matthew Austen of Oliver Wyman, a consultancy (see chart). Among the flurry of deals were the listings of three of the world’s largest financial institutions and one of its biggest industrial firms.
Extending that kind of success would have been a stretch in any event—the biggest deals were the first to be done—but the collapse in demand has gone far beyond the loss of particularly attractive candidates. Investment banks and accounting firms have spent the past year working frantically to prepare hundreds of Chinese companies for listings, only to find that the appetite for investment has crashed along with the price of China-related shares. There has not been a single offering in Shenzhen or Shanghai since September, and just one a month in Hong Kong. A senior executive at a global bank with a usually successful China business says no money has been made since June.
In the absence of demand in the public markets, private-equity players theoretically have the market to themselves, but most are locked into “pre-IPO strategic stakes” that in 2007 could be profitably flipped during a listing but now are frozen. Funds that do have surplus cash are holding it in expectation of redemptions from spooked clients, or redeploying it in America where a correct bet on a restructuring opportunity can make a career.
It is not all bad news. Some clever, cash-rich companies are taking advantage of an opportunity to buy shares in themselves, or in other companies. Sir Run Run Shaw, a 101-year-old media mogul, had hoped to sell his Hong Kong broadcasting company in the summer to a (briefly) rich Chinese property developer. On December 22nd, in the aftermath of the deal’s collapse, Sir Run Run bid to take private the 25% of the broadcaster’s parent that he does not already own. Numerous other deals of this sort are in the works, say local lawyers.
There are also renewed signs of interest in strategic deals. In July Carlyle, a private-equity firm, lost a three-year battle to acquire Xugong Group, a tractor company, in a move that was widely believed to reflect China’s growing resistance to outside involvement in its economy. But according to some bankers, the financial crisis has led regulators privately to suggest that such offers might now be viewed more positively. A critical test will be Coca-Cola’s $2.4 billion offer for Huiyan, the country’s largest juice company. If the deal is approved—no sure thing—it could herald others, which would naturally play to the strength of global banks.
China’s bankers and their regulators may also be facing disasters of their own, as the limitations inherent in a state-driven system become clearer. It is striking that the widespread closure of factories in southern China, the country’s principal manufacturing region, has led to no significant reports of credit deterioration. The only sign of apparent financial distress has been a largely unexplained capital infusion of $2.5 billion by the Bank of China into its Hong Kong-listed affiliate. The suspicion is that some, and maybe quite a lot, of the relative strength of the Chinese system reflects opacity rather than a more effective approach to allocating credit.
If so, then China may be due for its own round of financial restructuring and recapitalisation. It would once have been easy to argue that a market-driven system served up by big Western banks could do a better job of this than the government. When virtually every such institution has been given state support to stay in business, that case is much harder to make.
Ok, given that the cause of this recession is due to a lack of regulations, why is those guys here calling for less regulations in regards to China?
