Foreign investment in China's banking sector was called into question last month, prompting central bank governor Zhou Xiaochuan to speak out in defense of international banks' role in the recapitalization and listing of the big state-owned banks.
Criticism came in response to shares in China Construction Bank, which enjoyed a US$9.2 billion listing in October, trading at a much higher price than foreign banks paid for their stakes prior to the IPO. The likes of Bank of America secured their shares at about 1.2 times book value but the price had since crept to 2.7 times book value.
In an interview with Caijing magazine, Governor Zhou said the sale of shares to strategic investors did not amount to a government subsidy. He argued that, given the immaturity of China's financial markets, the price difference "should be viewed as the cost of the financial reorganization."
Coincidental or not, these developments were followed by hints of a slowdown in Industrial and Commercial Bank of China's plans to list this year. ICBC, the country's largest lender, froze talks with two Arab state investors negotiating for a US$1 billion stake in the bank. It was thought that a deal with Abu Dhabi and Kuwait's state investment agencies might push forward China's ambitions to acquire energy resources in the Middle East.
But the halt in negotiations, along with the fact that ICBC has yet to invite investment banks to bid to underwrite a listing, appears to have dampened earlier enthusiasm that led to talk of a US$10 billion dual listing in Hong Kong and the mainland. Regulatory approval is pending with regard to a US$3 billion investment from a Goldman Sachs-led consortium for a 10% stake in ICBC. The one major foreign investment that did receive the green light last month was Australian group ANZ's acquisition of a 19.9% stake in Tianjin City Commercial Bank at a cost of US$120 million. ANZ, Australia's third-largest lender, will provide an additional US$5 million for TCCB to build risk management, retail banking and trade finance capabilities.
The Chinese bank, the fourth-largest city-level commercial lender, will also have access to ANZ's intellectual property and technical resources while the Australian lender will have representation on the bank's board of directors.
BOC aims for IPO in first half
Bank of China, the nation's second biggest lender, is expected to sell shares in a flotation early this year to match the US$8 billion raised in an October IPO by the smaller China Construction Bank. With stock exchanges in the US and London inviting Chinese enterprises to go public, BOC president Li Lihui said his bank will select one or two stock exchanges in Hong Kong, New York, London and the mainland to issue stock. However, some experts believe BOC will follow CCB's lead and only go public in Hong Kong with full circulating H shares.
PBOC starts currency swaps
The central bank carried out its second currency swap on December 9 for US$2.8 billion in an operation cloaked in secrecy, Reuters reported. Ten domestic banks took part in the swap, each signing a confidentiality agreement preventing them from disclosing information to outsiders. Neither this swap, nor the inaugural one worth that took place on November 25 and saw the central bank sell US$6 billion at 8.0810 yuan and agree to buy it back in a year's time at 7.85, were officially acknowledged. Bankers say swaps could be conducted once or twice a month, giving the central bank another instrument with which to manage money market liquidity.
China to meet WTO banking terms
Liu Mingkang, head the China Banking Regulatory Commission, assured the financial community that its banking sector would open to foreign competition by December 2006. He also said the government would no longer bail out unprofitable banks in keeping with its terms of accession to the World Trade Organization of 2001. Liu confirmed that the CRBC's qualified foreign institutional investor program would remain the chief avenue for western bankers to participate in China's banking sector.
REIT prepares HK IPO
Chinese state-owned developer Guangzhou Investment released plans for the mainland's first property trust offering with a view to raising US$230 million through a Hong Kong IPO. The new REIT, dubbed GZI Real Estate Investment Trust, consists of four commercial buildings in the southern city of Guangzhou. Distributable profits are expected to jump about 44% to US$24.9 million in 2006, largely thanks to lease renewals at the White Horse Building, a garment wholesale center that accounts for about 70% of the REIT's revenues. However, going forward, organic growth of the REIT is likely to slow down as rental growth in White Horse flattens out in 2006 and 2007.
ICBC to boost SME lending
The chairman of ICBC said his bank was boosting loans to small and medium enterprises (SMEs) despite the higher risks tied to this type of lending. Like other Chinese banks, ICBC has traditionally lent to state-owned firms rather than smaller private firms, even though these now make up the majority of businesses in China. But Chairman Jiang Jianqing reported that, between January and November 2005, the bank had extended US$20 billion in new loans to 26,000 Chinese SMEs, up a third from the start of the year. This amounted to 22% of all new lending for the period.
CCB launches ABS consortium
China Construction Bank announced it was forming an asset-backed securities (ABS) underwriting consortium, becoming the second bank to offer such a service after the State Development Bank. CCB's first securities, backed by personal housing mortgage loans, will be known as Jianyuan 2005-1 and have a value of $US6.4 million. The securities will be issued by CITIC at the interbank bond market. CCB has invited qualified banks to join the underwriting consortium.
Chalco mulls two delisting deals
Hong Kong-listed Chalco said it was considering delisting two aluminum companies from mainland bourses as well as acquiring several other domestic smelting companies, the Wall Street Journal reported. Chalco, China's top aluminum producer by output, said it might buy out and privatize Shandong Aluminum and Lanzhou Aluminum, in which it already has stakes of 71.41% and 28% respectively. By taking the two companies private, Chalco would not have to alter the shareholding structures in accordance with Beijing's stock market reform efforts. The buyouts could cost US$445.7 million.
Fewer cars sales, less steel sold
China's steel mills are expected to suffer losses in rolled steel sales in 2006 as higher production costs hit an already weak do-mestic car market, according to a senior expert with China Automotive Industry Consulting and Development. Investment bankers estimated that car supply exceeded demand by 11% in China last year, and that the rate would likely reach 23% this year with no sign of a turnaround in the first half of 2006.
The once-languid copper market was in a convulsive state for most of the last quarter after rogue government trader Liu Qibing's wrong-way bet on copper futures on the London Metals Exchange left China committed to covering his short position by December 21.
Liu's sudden disappearance caused the market to skyrocket as the news of his short position spread, making it even more difficult for China to deliver 100,000 to 200,000 tonnes of the metal to market, as required by LME rules.
Copper prices had already risen 39% in 2005 as demand for the metal used in power cables and plumbing outpaced supply. Liu's act had copper selling for three-month delivery at a record US$4,435 a tonne on the LME December 2, more than double its mid-1996 price of US$1,943.
Keen to capitalize on the high prices, thieves in the US raided building sites for copper piping while miners in copper-rich Zambia, where China is heavily involved in exploration, called for higher wages. Workers on Chile's railway operator, which transports a lot of copper, also asked for pay rises. China's State Reserves Bureau, which acts as both regulator and trader, held four copper auctions in three weeks in an attempt depress market prices. By pushing down the price of copper closer to the level of Liu's short sell, the bureau hoped to minimize its margin in payments. But the strategy failed: as each of the four 20,000-tonne lots was put up for auction, progressively less was sold as traders balked at the high prices.
China's oil quest continues
With its takeover bid for PetroKazakhstan finally sealed, China National Petroleum Corp turned its attentions to South America as the country's oil giants continued in their quest to accumulate global energy assets.
CNPC was said to be conducting due diligence on oil and gas assets put up for sale by Bridas, the Argentinean energy group with an annual production capacity of around 78 million barrels of oil equivalent and a further 583 barrels in proved reserves. The deal is valued at US$5 billion but the Chinese group was thought to be unwilling to meet such a high demand given the large percentage of low-value Bolivian natural gas in Bridas' energy portfolio.
The Argentinean group wants to use the deal to bring in a partner to develop oil and gas business in Turkmenistan and south Asia but it is unclear whether a portion of Bridas' prize asset, a 40% stake in Pan-American Energy, would be among the bargaining chips.
Should the Bridas situation come to nothing, CNPC will not leave South America empty-handed. Last month, the company signed an US$83 million contract with Peru to explore for oil and gas near the Andean nation's richest natural gas field, and Peruvian President Alejandro Toledo saw it as a sign of good things to come. "If this 40-year contract is a success, investments in Peru's southeastern jungle could reach US$1 billion," he said. The country hopes to become a net energy exporter by 2009.
Not to be outdone by its rival, China National Offshore Oil Corp was also busy exploring overseas energy options last month. In an interview with Shanghai Securities News, CNOOC chairman Fu Chengyu said the company was looking into buying US$10 billion worth of non-core assets from Russian oil giant Yukos.
The Russian company wants to liquidate some of its assets to pay off taxes and debts resulting from an investigation that saw Yukos founder Mikhail Khodorkovsky jailed for eight years for fraud and tax evasion.
CNOOC also announced plans to start deep water oil and gas exploration in the South China Sea with Canada's Husky Energy, focusing on an area 300 kilometers south of Hong Kong.
Mining accidents kill 200 plus
Mining accidents killed more than 200 workers in four mishaps over a month, with one mine roof collapse and three coal mine ex-plosions, one combined with flooding. The worst explosion happened at the Dongfeng mine near Qitaihe city in Heilongjiang province in which 169 perished. Before that a roof collapse at the northern Kangli Mine near Xingtai city in Hebei province took the lives of 27. Another 16 workers died in two coal mine gas explosions at the Zhonghe mine in Liupanshui city in Guizhou province.
PetroChina signs Kuwaiti deal
China's biggest oil company, PetroChina, formed an alliance with Kuwait Petroleum Corp, paving the way for the construction of an oil refinery and a petrochemical plant in Guangdong at an estimated cost of US$5 billion. The deal, which would help quench the chronic thirst for fuel products in the Pearl River Delta region, is expected to open the door to international oil firms such as Royal/Dutch Shell and BP under a Kuwaiti government plan to bring in other investors. Final approval for the project is expected next year. PetroChina also plans to buy out CNPC's 35.73% stake in its profitable fuel oil subsidiary. The company said the deal would lift its shareholding in PetroChina Fuel Oil to 95.52% and it intends to assume full ownership "in the near future."
India plans to strike China deal
Indian Oil Minister Mani Shankar Aiyar plans to develop a strategic alliance with China during his Beijing visit this month. He hopes to sign a broad memorandum of understanding with Ma Kai, chairman of China's state energy policy planner, the National Development Reform Commission, that would have the competing Asian giants join in a quest for energy resources. CNPC and India's Oil and Natural Gas Corp have already agreed to team up to bid for assets worth up to US$1 billion in Syria. They are working on a joint bid for a 38% stake in Al Furat Production Company, Syria's largest oil group.
Producers call for gas price increase
In a call for Beijing to raise gas prices, China's top oil and gas producers, PetroChina and Sinopec said state-controlled prices for natural gas discouraged them from investing in gas fields. PetroChina said it hopes to more than double its current gas production to 45 billion cubic meters by 2010, or about 70% of the country's total gas output. But if prices remain lower than market levels, then there would be less incentive to invest further and reach the target, said Tang Yali, vice-president of the Natural Gas & Pipeline Company under PetroChina.
China Gas snubs Temasek
Hong Kong-listed piped gas distributor China Gas Holdings scrapped plans to sell a stake to Singapore state investor Temasek in favour of a deal with a state-owned Oman Oil Company for strategic cooperation. Temasek's City Gas had signed a memorandum of understanding allowing it to buy a 10% stake in China Gas, which is looking for investors to fund its expansion strategy. However, the Chinese firm saw more value in joint share venture with Oman Oil Company, through which it hopes to make future acquisitions as well as import liquefied nat-ural gas, crude oil and other energy products from Oman. As part of the deal, China Gas will sell the Oman group 210 million new shares for US$32 million.
CNPC gets Venezuela tax bill
Venezuelan authorities handed CNPC a US$101 million tax bill as part of an ongoing probe into tax irregularities in the energy sector. The bill was said to relate to income taxes for the period 2001 to 2004 and, if CNPC failed to pay within 15 days, the authorities threatened to impose an equivalent to between 25% and 200% of the original amount. Royal/Dutch Shell, Italy's ENI and US firm Harvest Natural Resources are among the companies who have been ordered to pay back tax. They are protesting all or part of the demands.
TECH & TELECOM NOTES
New AV standard approved
Beijing approved a homegrown audio-video standard that could challenge existing DVD coding formats and pave the way for China to set new global industry standards. It is believed the new digital coding and decoding technology, known as AVS, could save China more than US$1 billion in royalty fees. HD DVD, supported by Intel, Microsoft and Toshiba, is currently vying with the Apple, HP and Dell-backed Bluray disc to become the next generation of audio-visual technology used in digital televisions and video as well as 3G-based data services.
Mobile users must register
All mobile phone users will have to register with telecom providers within six months or face a cutoff in service, the Ministry of Information announced. The new rule is part of a crackdown on telephone fraud and illegal text-messaging practices, and the country's thriving trade in counterfeit mobile phones. Up to 200 million of China's 377 million mobile phone users have prepaid phone cards and buy the SIM card which activates the phone without any form of registration.
IPTV set for roll-out
Between 500,000 and one million households are expected to be able to receive internet protocol television (IPTV) by the end of the year, the South China Morning Post reported. China Telecom and China Netcom have undertaken small scale trials of IPTV services in 10 provinces with Alcatel IPTV. The most advanced of these is from the sole IPTV licensee, Shanghai Media Group, which offers 60 channels and more than 5,000 movies on demand for US$7.4 a month. Alcatel expects 72 million IPTV users by 2010 as fixed-line operators upgrade telephone networks.
Siemens sees China growth
Siemens China president and chief executive Richard Hausmann said the company expects to meet its target of doubling its 2003 China revenues by the end of September 2006. The company reported a 15% rise in China sales to US$5.49 billion up to September 2005. New orders grew 34% to US$6.9 billion. Siemens China added 18 companies to its portfolio over the past year, bringing the total to 70 companies in a range of industries including telecommunications, power, transport, medical products, logistics and electronics.
Nokia mobile China sales up 77%
Finland-based Nokia increased mobile phone sales in China 77% in the first three quarters of 2005 year-on-year, selling 23 million units and earning US$3.3 billion in sales. "We believe that by 2010, China will have added another 250 million mobile subscribers, making it the single largest mobile market in the world," said Nokia CEO Jorma Ollila.
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