The Netherlands has had a financial stake in China far longer than most countries. Trade between Holland and China dates back to the 17th century, when the Dutch East India Company – the world’s first multinational – started exporting porcelain and tea to Europe.
Nearly 400 years later, trade between the countries is still flourishing, though it’s now tied to products like machinery, raw materials, chemicals and electronics. In 2009, bilateral trade amounted to US$38.2 billion. That was down slightly from a high of US$41.2 billion in 2007 due to the global economic downturn, but still a dramatic increase from US$11 billion in 2000.
Holland is now China’s second-largest trading partner in the EU, which has spurred direct financial investments in both directions. Because Rotterdam is the main port for Chinese goods entering Europe, many Chinese companies are setting up distribution centers in Holland to manage the flow of goods across the continent.
Dutch companies, meanwhile, are flooding into China at a remarkable clip. About 1,800 Dutch firms now operate in the country, and in the first nine months of the year, their investments totaled US$852 million.
In just one example of how high some Dutch companies have set their sights, chemical giant AkzoNobel (AKZA.Euronext) opened a US$385 million, 50-hectare manufacturing base in Ningbo in early November. It plans to double its China sales to US$3 billion by 2015.
Follow the money
All of this means a greater opportunity for Dutch banks and financial services companies to do business in China. Many have already begun to expand their operations.
"There are higher returns to be made on this side of the world," said Albert van Pabst, a financial counselor in the Economic and Commercial Department at the Dutch embassy in Beijing. "Capital flows this way and banks follow the money. The Netherlands has the seventh-largest financial industry in the world so it’s logical we are expanding here."
Dutch banks have ambitions beyond just servicing Dutch companies based in China, however. Given that the foreign share of China’s banking industry is just 2%, many institutions see huge potential for growth provided they can leverage their unique strengths and develop new businesses targeting specific industries.
"We can only compete on expertise," van Pabst said. "The fact is that China is in the process of reforming its capital markets and it needs innovative products to make capital markets more efficient. It is welcoming foreigners to come in with their experience."
For Rabobank, this expertise is in the food and agricultural wholesale sector. In June, the Dutch lender formed a partnership with Agricultural Bank of China (ABC; 601288.SH, 1288.HK) to expand its financing arm in China to reach small- and medium-sized wholesale businesses that are seeking to go abroad. To secure the deal, Rabobank invested US$250 million in the Chinese lender’s US$22.1 billion initial public offering, the largest IPO in history.
The partnership is just part of the bank’s overall strategy for increasing its Asia revenue by 50% by 2014; the firm is also expanding heavily in two other key agribusiness markets, India and Indonesia. According to Rabobank’s research, Asia represents 45% of the world’s total food-processing market – a share that is bound to increase as urbanization speeds up across the region.
Rabobank already has a representative office in Beijing, which it plans to upgrade to a branch in the next few years. But rather than build up an extensive branch network across the country, it wants to use ABC’s existing network of 24,000 branches to make connections with farmers and small businesses outside cities.
The bank is initially focusing on only eight key agribusiness areas, including sugar, dairy, poultry, pork and beef, and grains and oil seeds.
"I don’t think we want to compete everywhere with Chinese banks, as they usually have local advantages in terms of funding," said Orlando Wang, general manager of Rabobank China. "We want to position ourselves as a knowledge bank and target companies with international ambitions."
In July, for example, Rabobank advised the Chinese company Bright Dairy (600597.SH) on its US$58 million purchase of a 51% stake in the New Zealand milk processing company Synlait Milk. Bright Dairy made the investment – its first in an offshore processing facility – to take advantage of positive domestic consumer perceptions of foreign dairy producers untainted by association with the domestic melamine scandal.
The insurance boom
Financial services giant ING (ING.NYSE), meanwhile, has trained its eye on two other growth industries: life insurance and real estate.
Unlike most foreign players, ING has had two life insurance joint ventures in China for much of the past 10 years: Pacific Antai Life, a collaboration with China Pacific Insurance that came under ING control after it purchased Aetna (AET.NYSE) in 2000, and ING Capital Life, a joint venture established with Beijing Capital Group (600008.SH, 2868.HK) in Dalian in 2002.
Though both businesses grew rapidly as China began to embrace the concept of personal and group insurance policies for the first time, new regulations passed by the China Banking Regulatory Commission (CBRC) in November 2009 dramatically changed the landscape.
As part of its efforts to integrate its financial sectors, the CBRC announced that it would begin allowing all commercial banks to invest in insurance firms, but each bank could only invest in one insurer at a time. A month later, ING said it had reached an agreement with China Construction Bank (601939.SH, 0939.HK) to sell its stake in Pacific Antai Life.
According to ING, the sale was both an opportunity to consolidate its life insurance businesses and further expand its sales base in China.
In February, Bank of Beijing (601169.SH) won approval from the CBRC and the China Insurance Regulatory Commission to acquire Beijing Capital Group’s 50% stake in ING Capital Life. Bank of Beijing, which spent nearly US$100 million to acquire the share, became the fourth domestic bank to purchase a stake in a domestic insurer.
The deal also proved fortuitous for ING, which holds a 16% stake in Bank of Beijing and had been selling ING policies through Bank of Beijing branches for the past five years.
"[Bank of Beijing] believes the life insurance market in China is a very promising one," said Ronald Scherpenhuijsen Rom, executive director and vice president in charge of retail banking at Bank of Beijing.
"I don’t think the life insurance business has matured at all in China yet."
Bank of Beijing, which has more than 150 offices in the capital, is also planning an aggressive expansion across China over the next few years, which will help ING reach more clients. The bank already has eight regional offices in cities like Shanghai, Shenzhen and Xi’an, and is planning to open two or three new offices each year.
In September, Bank of Beijing was also granted approval by the Dutch central bank to open a representative office in Amsterdam, which Scherpenhuijsen Rom said should happen over the next six months. This office will coordinate communication between ING’s corporate headquarters and Bank of Beijing, as well as assist Chinese companies that want to invest in Holland, and Dutch companies seeking to go to China.
"We consider ourselves extremely fortunate to have this investment in Bank of Beijing," Rom said.
"Having a substantial stake in a smaller bank probably gives you more influence than having a small investment in a big bank. It’s also helping ING understand how China works, how it ticks and how we can benefit from it, which is extremely important."
Separate from its dealings with Bank of Beijing, ING also sees tremendous potential in financing in the real estate sector, especially since Chinese government restrictions on bank lending to developers over the past couple years have left many short on cash to complete residential housing projects.
In June 2009, ING Real Estate launched a second China property fund with a view to raising US$500-750 million to purchase land, unfinished projects, and stakes in real estate firms. The company said it planned to use the China Opportunity Fund II, as it’s being called, to make nine or 10 investments, each worth some US$50-75 million, with an expected internal rate of return of over 20%.
ING already has a US$500 million real estate fund in China and works with such developers as Shanghai Forte Land (2337.HK), Gemdale (600383.SH) and Longfor (960.HK) on projects all over the country.
The company said it will focus some of its attention on second- and third-tier cities, where demand for properties remains high despite the government’s efforts to cool the market and keep prices from spiraling out of control.
"We continue to see strong demand for good, quality, affordable housing across China, driven by demand from a growing middle class," said Eduard Wehry, managing director for ING Real Estate Investment Management, Asia. "In general, prices and affordability in second- and selected third-tier cities remain healthy."
Wehry said the company will begin actively marketing the China Opportunity Fund II to interested developers in early 2011.
Compared with ING and Rabobank, the Dutch fiduciary services provider ATC (ATAC.NASDAQ) is a relative newcomer to the China market. The company, founded in 1893, had focused almost entirely on the European market before opening its Hong Kong office in 2000. Then in October ATC announced it would open its first mainland office in Shanghai.
Gary Wong, commercial director for corporate services in ATC’s Hong Kong office, said the company will initially rely on its strengths in fund administration, private equity services and capital markets transactions as it tries to establish its brand in China.
Though third-party administrators are not all that common in China now, Wong sees their role growing in importance.
"What we see happening by 2020 is that Shanghai will be the Chinese financial center. You’ll have lots of international [private equity] funds investing in local funds and they’ll want international standards," Wong said.
"A lot of city- or state-owned funds are not familiar with a third-party administrator. We need to communicate more with local governments to promote this service. We actually get very positive feedback from them now; they see us as gatekeepers to help them protect their funds, too. But it takes time to develop the market."
In addition to helping foreign private equity firms target Chinese companies to acquire and facilitating those deals, ATC wants to position itself as a services provider for Chinese firms interested in outbound investment.
One way it can do this is by helping Chinese firms set up holding companies in Holland to optimize their returns on investment by reducing their tax exposure, Wong said.
For example, ATC recently assisted a Chinese sportswear manufacturer that wanted to purchase the rights to sell an Italian sportswear brand in Asia. The Chinese company set up a Dutch intermediary entity through which it could make its royalty payments to the Italian company, thereby saving immensely on taxes; among the benefits of the Dutch tax system is that it does not tax royalties.
"When Chinese enterprises are ready to invest, we always recommend them to seek proper advice, as the savings can be substantial and the costs can be limited," Wong said.
European tax haven?
Holland’s favorable tax structure is drawing other investors from the mainland, too, according to Guy Wittich, executive director for China at the Netherlands Foreign Investment Agency, a Dutch government agency that facilitates direct investment in Holland.
The country has a corporate tax rate of 25% – putting it in the top tier of most favorable corporate tax rates in the EU – though Wittich said it’s even possible to bring this down to 10-15% through various accounting practices.
Furthermore, the Netherlands and Hong Kong have just negotiated a tax treaty that will allow Hong Kong investors to repatriate dividends from Holland without paying withholding tax, provided certain conditions are met. The treaty is expected to go into force on January 1 in the Netherlands and on April 1 in Hong Kong.
However, the Netherlands is not keen to be seen as a tax haven. Many Chinese companies are setting up brick-and-mortar businesses in Holland – not just holding companies – because Rotterdam is the main point of entry for Chinese products to Europe. Some of these businesses include warehousing, product design centers, marketing and sales offices, and product assembly facilities.
"Companies actually have business to do in the Netherlands," Wittich said. "Many companies have their European distribution centers based in the Netherlands."
Thus far, about 260 Chinese companies have invested in the Netherlands, and the number is growing every year. Investments from China jumped by 20% from 2008 to 2009.
Chinese acquisitions of Dutch companies have also been on the rise in recent years. Three years ago, China International Marine Containers (200039.SZ), a Shenzhen-based container manufacturer, bought a Dutch rival, Burg Industries, for US$147 million. Last year, Hunan-based XEMC Windpower (600416.SH) purchased Darwind Holding, a Dutch builder of offshore wind turbines, for US$102 million.
And where Chinese companies go, Chinese banks and financial institutions are sure to follow.
Bank of Beijing may be the latest Chinese contender in the Dutch retail banking market, but Bank of China (601988.SH, 3988.HK) became the first to set foot in Holland when it opened a branch in Rotterdam in 2007. Industrial and Commercial Bank of China (ICBC; 601398.SH, 1398.HK) is now planning to open a branch in Amsterdam in the next couple of months, one of five the bank is opening in Europe.
Wittich said that with the increased investment in recent years, there’s a need for Chinese banks to assist investors with business development, mergers and acquisitions, and other financial services. But some banks are also thinking bigger.
"Companies like ICBC have larger ambitions," he added. "They not only want to service the growing number of Chinese companies established in the Netherlands, but also the Dutch companies doing business with China."
Chinese financial institutions have also shown an interest in learning from their Dutch counterparts about sustainable investments and financial services, an area in which the Dutch have particular expertise.
"For Chinese firms, there’s substantial interest in this now," said van Pabst of the Dutch Embassy.
"China wants to be seen as a country and economy that is working on sustainability very aggressively and the financial industry doesn’t want to stay behind. This is part of their future strategy."
According to Wittich, both China Development Bank (CDB) and the Export-Import Bank of China have been in contact with officials in the Dutch financial services industry to learn more about policies on sustainable lending and investing.
CDB is at the forefront of green lending in China – this year, it has approved US$24 billion in loans to five companies involved in clean energy projects, including Xinjiang Goldwind Science and Tech (002202.SZ, 2208.HK), Suntech Power Holdings (STP.NYSE), and Solarfun Power Holdings (SOLF.NASDAQ).
The Holland Financial Center, an organization set up in 2007 by financial institutions and government agencies to promote the Netherlands as a financial center, has become one of the main sources of information for Chinese companies on the topic.
Not only does the center provide logistical support to foreign financial firms establishing branches in Holland, it also has an office dedicated to educating businesses on sustainable financing.
"When it comes to investing in a sustainable manner … this is a specific area where the Netherlands can be of value to China and is increasingly looking to market this experience," van Pabst said. "This is the opportunity for us right now."
Sustainable development is, of course, just one area in which Dutch firms provide Chinese financial institutions with the expertise and know-how to compete on a broader scale. They are well-placed to benefit as China’s financial sector becomes more sophisticated.
It’s some distance from porcelain and tea, but the Sino-Dutch commercial relationship remains strong almost 400 years on.