When news emerged of talks between CITIC Securities and Bear Stearns, it was widely assumed that the US bank, beleaguered by America’s subprime mortgage crisis, was looking for someone to bail it out.
However, the resulting deal – which will see each party invest US$1 billion in the other – didn’t suggest that CITIC mugged the ailing Bear. What came about appears to have been the product of more than a decade of Wall Street networking by one man: Chang Zhengming, vice chairman of CITIC group, the State Council’s investment arm of which CITIC Securities is a subsidiary.
According to Chinese media reports, Chang had been in contact with Bear as early as April 2006 while serving as president of China Construction Bank. Once installed at CITIC, he held talks with several potential partners for CITIC Securities but settled on Bear.
“The high valuation of CITIC Securities shares in Shanghai and Bear Stearns’s falling share price must have occasioned the deal,” said a source at CITIC who asked to remain anonymous. “CITIC Securities is a still a very local firm and it doesn’t have the talents to bring about a major outbound investment deal of this size. The real push seems to have come from CITIC leadership” – meaning Chang.
Chang has a strong track record as a dealmaker. He had a hand in the public debuts of both China Construction Bank (CCB) and CITIC Bank as well as helping to negotiate Bank of America’s US$2.5 billion pre-IPO investment in CCB. He is at the forefront of corporate China’s push into the global arena.
Just in the last few weeks, Industrial and Commercial Bank of China (ICBC) added 20% of South Africa’s Standard Bank to its portfolio. Meanwhile, ICBC and Bank of China are both said to have been approached as potential buyers of struggling UK lender Northern Rock.
Then there is China Investment Corp (CIC), which has been charged with investing a chunk of the country’s foreign exchange reserves. Vice Finance Minister Li Yong said last month that two-thirds of CIC’s US$200 billion kitty will be spent at home – buying Central Huijin, the central bank’s investment agency which has big stakes in the Big Four state banks, and re-capitalizing Agricultural Bank of China and China Development Bank.
The remaining third will be channeled into overseas assets. Apparently foreign oil, aviation and telecom sectors will not be targeted, but with a stake in US private equity group Blackstone already under its belt, CIC is a force to be reckoned with.
Drive to diversify
One of the key themes of this outbound strategy is currency-risk hedge. As of September, China’s foreign exchange reserves stood at US$1.43 trillion, 70% of which is said to be held in US dollar-denominated assets. On this basis, the 5.4% decline in the dollar since the start of the year means China’s holdings have lost as much as US$35 billion in value.
Beijing appreciates the need to diversify and this means outbound investment in hard assets such as companies and natural resources. However, it is working from a low base. Outbound investment was just US$21.16 billion in 2006, or 1.5% of total forex reserves.
It has been said that this figure could rise to US$70-100 billion within five years but some skilled institutional investors will be required to do this effectively. The likes of Chang are in short supply.