When a Chinese engineering firm sets off to build a road or a dam in a distant country, a Chinese bank is usually not far behind them. Bank branches bearing Chinese characters can be found on the streets of Lima and Warsaw, as well as Paris and New York.
A deal at the end of October in which China Construction Bank (CCB) acquired a lender in Brazil underscores the size of the banks’ ambitions. The second-largest Chinese bank by assets agreed to pay 1.62 billion reais (US$716 million) for 72% of Banco Industrial e Comercial.
By all accounts this appears a logical deal. Trade between these two BRIC giants has blossomed for over a decade, growing from US$6.7 billion in 2003 to nearly $75 billion in 2012.Vessels carrying commodities to the East to fuel Chinese growth pass vast container ships loaded with finished goods sailing the other way, destined for consumers with new disposable incomes.
But the hard part is to come. This is CCB’s first overseas acquisition and it will test its management capabilities in a country much different to home. Brazil’s economy, once booming, has started to stall; its richest man has lost most of his fortune in less than 12 months.
CCB has grown into a major bank from its domestic operations, benefitting like its other state-owned peers from an interest rate policy fixed by Beijing that favors lenders over depositors. As domestic expansion starts to ease and competition at home rises, it is looking abroad. The bank is reportedly sitting on a war chest of US$15 billion earmarked for overseas acquisitions.
By going to Brazil it will follow a well-trodden path of Chinese banks expanding abroad to cater to the growing number of local businessmen targeting new markets. “The acquisition will help CCB serve those of its corporate clients investing in Brazil and gain non-China-related overseas exposures,” Christine Kuo, a senior credit officer with Moody’s in Hong Kong, said in a note.
Industrial and Commercial Bank of China, Agricultural Bank of China and Bank of China have either already acquired foreign banks or harbor such plans.
According to Doug Young, a longtime observer of the Chinese business environment, when large state entities hunt in packs it is usually at the behest of their political masters. “One comes to realize that new trends among big state-owned enterprises often happen quickly and in waves in response to directives from Beijing,” Young wrote of CCB’s move in a recent blog post.
That works when there is demand to serve. However, the once blossoming relationship between two of the largest emerging markets has entered a difficult phase. By some measures, up to US$70 billion in Chinese projects announced in the South American nation since 2007 have been cancelled or are on hold. Senior Chinese business executives complain of protectionism.
Brazilian officials, reacting to their economic slowdown, are taking steps to support local businesses at the expense of outsiders. The country already imposes strict restrictions on foreign investments. Soon there might not be many clients for CCB to serve.
Even if there are, its state management structure could complicate the bank’s ability to compete. First, it has to prove that it can devise products and services that appeal to clients in the Brazilian marketplace, said Yu Fenghui, an independent consultant and financial commentator.
“Whether the low-efficient inner management of CCB can meet the demand of market-oriented management in Brazil is also a challenge,” said Yu. “It is a common problem [for the bank] whether it’s entering the Brazilian market or any other capitalist countries.”
At least CCB’s punt on Brazil is less risky than some other big overseas Chinese banking investments since the 2008 financial crisis. The small size of the deal relative to its assets won’t throw the Chinese bank in the deep end if it goes wrong, noted Moody’s Kuo.
Senior executives are hedging their expansion bets with an eye on Europe. The worst of a crippling debt crisis seems to be over and talk of the breakup of the eurozone has slipped off of the front pages of local and international newspapers.
CCB just opened its European headquarters in the tiny state of Luxembourg, a financial hub hoping to challenge London as an offshore yuan center. CCB Chairman Wang Hongzhang told the Financial Times at the end of October that it is looking at acquisition targets in the region.
This could be the moment to get in. “Europe has just passed its debt crisis and the economy is now recovering. If the economy is recovering, the financial industry will be recovering, too,” said Yu. “So it is a perfect timing for entering the European market.”