The announcement yesterday that China Development Bank is to invest as much as Euro9.8 billion (HK$105.8 billion) - the mainland's largest foreign investment ever - to acquire a stake in British bank Barclays illustrates just how much the balance of relationships has shifted over the past couple of years when it comes to foreign companies doing business with or in the mainland. But although the rules have changed, it does not mean the game has become any easier to win, nor that yesterday's deal will necessarily turn out to be good one for either bank. Until now foreign banks looking to set up business in the mainland would typically buy a minority stake in a mainland bank in the hope it would get them a foot in the door. These days, however, although Beijing still wants foreign know-how, it has little need of investment dollars. Instead, it is encouraging mainland companies to invest abroad in order to recycle its glut of capital. At first glance that looks fortuitous. The British bank is locked in a takeover battle for Dutch rival ABN-Amro, and needs cash to sweeten the deal it is offering ABN's shareholders. The investment by CDB saves Barclays from the ignominy of funding its bid with a share offering at a deep discount to the market. Barclays, a relative late-comer to banking in the mainland, is also hoping the tie-up with CDB will open doors to state companies and generate new sources of revenue for its asset management and commodities arms, as well as its business in Africa, where it has over 1,000 branches. Yet there is much that could go wrong, both for Barclays and CDB. CDB's investment is unlikely to encounter much official resistance of the sort that scuppered CNOOC's bid for US oil firm Unocal two years ago. But for a high street bank such as Barclays, having a mainland state policy bank as its largest shareholder could prove problematic. Doing business with repressive foreign governments can make you a lightning rod for popular protest, as Barclays found to its cost in the 1980s when its ownership of a bank in apartheid-era South Africa triggered a consumer boycott in its home market of Britain. CDB also faces risks. It is far from certain that a Barclays takeover of ABN-Amro will generate value for shareholders. The British bank has recently done well assimilating a couple of relatively small foreign acquisitions but the proposed ABN deal is of a different order of magnitude altogether. If it goes ahead it will be the world's biggest ever bank merger, creating a US$160 billion behemoth, not far behind giants such as Citigroup or HSBC. But ABN-Amro has performed poorly recently (see chart), which is why it is a target in the first place, and will surely prove hard to integrate with Barclays' operations. Worse, at that size, economies of scale begin to break down for banks and the challenges that managing far-flung businesses in very different cultures can prove all but insurmountable, as recent lacklustre stock price performance at both HSBC and Citi shows. For Barclays, the bid is a far cry from 10 years ago when it retreated from an ill-judged venture in international equity capital markets to concentrate on its core banking business. That move restored investor confidence. A takeover of ABN-Amro could destroy it all over again, and prove very costly for CDB.
