Big things may come of Scottish bank's modest China aims

If there were a script for the right way to invest in one of China's big four banks, Royal Bank of Scotland would be following it to the letter.

Compared with Bank of America, which in June pledged US$3 billion for a 9 per cent stake in China Construction Bank, RBS is being relatively modest in its aims. But by shooting low, the Edinburgh-based bank has secured what may well prove to be a better deal in the long run.

RBS has spread its risk by enlisting two passive financial investors as its partners. The Scottish bank is putting up just US$1.6 billion of its shareholders' money.

However, by heading a three-member consortium including Merrill Lynch and the Li Ka-shing Foundation, which are contributing US$750 million each, RBS has gained effective control of a 10 per cent stake in the Bank of China and a seat on the board, ensuring it can punch above its weight when it comes to exerting management influence.

More to the point, chief executive Fred Goodwin says RBS has signed a deal giving it exclusive partnership rights with Bank of China to develop key product areas, including credit cards, wealth management and personal insurance. This is the Holy Grail for foreign strategic investors in Chinese banks and something of a coup for RBS.

Until now many foreign bankers have been put off investing in the big four state banks by their deep-seated management problems, doubtful loan portfolios and quasi-governmental role in supporting inefficient industries. On the other hand, foreign investors are keen to get in with part-shares in potentially lucrative start-up businesses such as credit cards and funds management, which can capitalise on the Chinese banks' vast retail networks.