Newbridge Capital's June acquisition of an 18% stake in Shenzhen Development Bank added another member to that small but growing club of Chinese banks with foreign shareholders. It is a little ironic that a private equity firm whose business is not banking, but buying and polishing up assets for resale, should be the foreign player to land the largest stake in a Mainland bank to date.
Foreign banks have been courting Mainland banks for years, aiming to get first mover advantage to open up distribution channels in China's huge financial services market. With their reputation for trust and competence, they are counting on high quality companies and high net worth Chinese individuals to flock to foreign and foreign-linked institutions.
HSBC, with a 8% stake in Bank of Shanghai, has also agreed to buy 50% of Fujian Asia. Hang Seng Bank, a subsidiary of HSBC, has agreed to buy 16% of Industrial Bank of Fujian and Citibank has a 4.6% share of Pudong Development Bank (PDB). Others, like Standard Chartered Bank which is now negotiating for a stake in China Everbright Bank, should follow.
The foreign banks will no doubt increase their shareholdings as and when they can. It would be surprising if Citibank didn't exercise its option to increase its PDB stake to 25% in 2008, as provided for in the original terms of its deal.
But even small stakes in banks can deliver dividends, especially in a market like China's. Long after all WTO liberalizations kick in, there will still be elements of China banking that will be off limits to strictly foreign banks – so related banks should make useful proxies to pursue opportunities.
HSBC could be on the verge of making its biggest acquisition to date. The Bank of Communications, China's fifth largest bank, announced in May that it was in talks with HSBC about a 15% stake. HSBC, however, declined to comment on the announcement, stressing it would be opening more of its own branches in China before buying more stakes in local banks.