For some of the global financial services sector’s most venerated names, it is a buyer’s market. The subprime mortgage crisis is deepening, monoline insurers are struggling and new concerns are emerging about the prospects for large issuers of consumer credit – in the US and Europe.
Financial services have become a primary target for outbound Chinese investors, including the country’s sovereign wealth fund, China Investment Corp (CIC), big state banks and investment trusts, and cash-flush domestic insurance companies.
Three drivers are propelling this forward. First, after years of criticism over poor management of the state banks, China’s leaders have turned a corner. Now feted for the sucessful listings of those same lenders, these leaders are also called upon to bail out some of the most prestigious names in banking.
Secondly, distressed assets are attractive targets for opportunistic Chinese buyers. They want to find outside of China the kind of fast turn-around, balance sheet boosters they can easily find at home.
Thirdly, the large global banks shopping for infusions of capital appear to be bankrupt-proof, just like China’s state banks. The semi-nationalization of Northern Rock by the UK government and the recent move by the US Federal Reserve to save Bear Stearns confirm the idea that the national utility of large financial institutions will preserve them from bankruptcy.
There is now a crisis of confidence in this strategy, which led China Daily in mid-March to declare that China’s “love affair” with Wall Street is over.
As the financial crisis in the US and Europe has deepened, China’s funds and banks have suffered along with other investors. Viewed in the shortest of terms, the performance of foreign investments by mainland financial institutions has not been good.
Shares in Blackstone have sunk almost 50% since CIC bought into the private equity firm in June last year. The failure of Barclays to acquire ABN AMRO has wiped 40% off the value of China Development Bank’s investment in the UK-based bank. Shares in Morgan Stanley are down 23% on December levels when CIC bought a US$5 billion stake. Ping An Insurance paid US$2.8 billion for 4.2% of Dutch-Belgian bank Fortis only to see the value of its holding decline by 20% to date.
These unrealized losses look even worse when adjusted for renminbi appreciation and viewed in terms of renminbi returns.
But the fundamental appeal of financial sector investment overseas is unchanged. At worst, there is a sense that timing could have been better. There are also broader strategic goals in play, such as promoting domestic reform through participation in foreign financial service firms.
Reason for optimism
Some recent successes are also encouraging further investments. China Life put US$300 million into Visa’s mammoth initial public offering and is presently sitting on a 36% gain. CIC put US$100 million into the offering. It is evident that China’s large funds, banks and insurers will continue to fish the choppy waters of global financial services, likely expanding their net to include interests in insurance, reinsurance, leasing companies, consultancies and service companies. Private equity firms, hedge funds and venture capital could also come into the equation.
Sellers seeking Chinese investment would do well to invest in understanding what is behind these decisions.
The mix of drivers has its own Chinese characteristics, being a product of the unique challenges China faces in managing its wealth and sustaining growth. These drivers include pressure to diversify geographies, currencies and target types; the need for short- and mid-term growth potential and for cash-flow potential; and the desire to impact their own domestic reform agenda.
Results from domestic activity of large Chinese enterprises in 2006 and 2007 demonstrate the importance of wealth creation through financial asset investment to complement operational earnings on their balance sheets. In the broadest overview, we are watching now a similar transformation of the national economy, as China’s success as a global exporter of goods and services is being complemented by a strategy to create more wealth through global financial investment.
It is far too premature to declare the love affair over. In fact, it is just beginning.