China tells banks to up their game to support corporates’ M&A mission
Despite a year of aggressive overseas expansion moves and eye-watering acquisition deals, mainland Chinese banks are taking the flak from one of the most influential architects for the state’s internationalisation strategy and from the state for not doing enough to support the internationalisation targets of Chinese corporates.
Li Ruogu, the influential former chairman of policy bank Export-Import Bank of China and now executive vice president of the International Financial Forum, said the level of service that Chinese state-owned banks offer are “not up to standard.” The placement of the branch network they have in place is not suited to meet Chinese corporates’ needs for large-scale overseas investments, he said.
Ma She, deputy director of European affairs at Ministry of Commerce, also slammed banks’ overseas branch network as “underdeveloped” and runs on insufficient management of data sharing. The issue makes life difficult for small and medium-sized companies to obtain banking services and financing when they look to take their business overseas.
Chinese corporates are hobbled by high financing cost or simply not receiving any financing at all when they attempt to go overseas, said Ma. It is a sensitive issue in meeting the state’s grand plan for Beijing’s “Going Out” strategy. Li and Ma made their comments at a financial forum in the tropical island of Hainan on Sunday.
Li said Chinese companies do not hold sufficient funds in their reserves when they invest abroad - noting that there is still insufficient risk consciousness that there is not yet a robust enough credit insurance system or investment protection for cross-border investments.
Ma criticised mainland financial institutions for being serious laggards in their progress for internationalisation - he told banks to hasten their overseas branch expansion in order to provide better service coverage and delivery, with a particular focus on enhancing their capability to provide offshore asset financing.
Mainland Chinese financial institutions’ aggressive moves in 2015 now see them dominate the league tables for equity financing and debt capital market activities’ in the Asia-Pacific region. CICC, Citic Securities and China Securities are starting to be featured in regional league tables for the M&A market - but no Chinese player so far has been featured in global, US or European deals.
Mainland financial institutions’ own aggressive acquisitions overseas for the year instead has been a lucrative source of investment banking fees. But the business models behind their acquisition strategy are criticised both abroad and domestically for lacking in coherence.
Amongst a broad spectrum of deals, only Bank of China is consistently cited by analysts for being a leader in carrying out the “RMB Internationalisation” strategy. In 2015, it plotted new additions of its overseas satellites along the “Belt and Road” theme, buying out whole bank franchises in Turkey and Malaysia; while opening a bullion trading centre in London and another for commodities in Singapore.
But in the insurance and securities sphere, some deals may be a stretch. Haitong Securities made a foray into Latin America with the acquisition with Portugal’s Banco Espírito Santo de Investimento, raising brows amongst their established foreign banking partners such as BNP Paribas.
The privately-owned Anbang Insurance, also announced a plan to transform itself into a global financing franchise, but bought into a score of already mature but thin margin insurance markets through a score of deals in the Benelux region, US and South Korea.
Ma promises the government will do its part to help smooth relations in target nations, simplify bureaucracies for companies in seeking investment approvals, help attract international mergers & acquisition talents and bolster the local legal and professional services community.
“There is still too much inefficiencies and repetitive issues around regulatory approvals, foreign exchange controls, tax and visa issues,” said Ma.
In the end, it is the corporates that are the focus. They will need to do better in upping their game, Ma said.
Much, too, is still to be desired in the quality of their chosen investment targets, added Ma, along with the sophistication of the deal structures deployed for execution, or the investment returns Chinese companies actually get.
There is still some gap in Chinese corporates’ ability to manage complex cross-border structures. China needs to do better in their ability to come up with innovation or viable business models. China is missing world-class multinational corporations amongst its ranks, Ma said.
More thought should be paid to the cultural difference when companies integrate their new trophy acquisitions.
“It does not help companies are not proactive enough in developing their corporate identities,” he said. There is still insufficiency in the knowledge of local culture and communities. As a result, some Chinese companies have failed to adapt, he said.