Friday, March 28, 2008

China banks learn to say no to risky deals-sources

Chinese banks, widely considered as possible buyers of more U.S. financial assets amid the snowballing credit crisis, are becoming picky and cautious due to increasing concerns about investment risks.

After China's state-controlled CITIC Securities narrowly avoided taking a bath on a proposed investment in the ailing Bear Stearns Cos Inc, the Chinese government is insisting that any major foreign investment by state entities gets approval from the cabinet before a final deal can be reached, according to sources with direct knowledge of the situation.

Even before that, there had been increased nervousness about doing bank deals.

China Construction Bank (CCB), one of the country's Big Four banks, has turned down nearly 30 proposals of possible acquisitions over the past year, including opportunities to buy stakes in troubled U.S. home mortgage lender Countrywide Financial Corp and British bank Northern Rock, the sources said.

CCB, China's top real estate lender, was invited by Goldman Sachs Group Inc late last year to join bids for Countrywide, the biggest U.S. home loan issuer, said the sources, who declined to be identified because they weren't authorized to speak on the record.

CCB turned down Goldman Sachs' proposal after the Chinese bank decided that an equity investment in Countrywide would be too risky for the Chinese bank to bear.

"It's always a question about how to balance your risk and chance," said one of the sources with knowledge of the Countrywide proposal that was presented to CCB. "If risks are bigger than the chance to make money, why should we go for it?" he said.

Countrywide, based in Calabasas, California, lost $703.5 million last year, its first annual loss in more than 30 years, amid the credit crisis, and its share price sank. It eventually agreed in January to be acquired by Bank of America Corp for about $4 billion in a deal advised by Goldman Sachs.

Like CCB, senior executives at other major Chinese banks said they receive such "invitations" from global investment banks "on a weekly basis". However, their interest in U.S. financial assets has waned because they are concerned the crisis may still have a way to go and the shares could go significantly lower.


The big Chinese banks, once in deep financial trouble but stronger now after government bailouts a few years ago, have become popular destinations for investment bankers shopping assets. This is because they are seen having both the desire to grow globally and the means, given big share price gains and China's nearly $2 trillion in foreign exchange assets.

Early this year, CCB also received an invitation from British billionaire Richard Branson's Virgin Group, which suggested CCB should join its bid to acquire the troubled British bank Northern Rock Plc, according to the sources.

Virgin Group's senior representatives flew to Beijing to enter formal negotiations with CCB as they wanted to finalise a plan to jointly invest in Northern Rock. However, the idea was eventually vetoed by CCB's board members who believed the risks of such an investment were too high, the sources said.

"The risks are either exchange rate risks, interest rate risks or integration risks. And of course some countries where the acquisition targets are located were not friendly and did not want to provide any support to us," CCB chairman Guo Shuqing told an official Chinese newspaper last week. He didn't specifically name any possible overseas deal.

The U.K. government decided to nationalise Northern Rock last month after Britain's fifth-largest mortgage lender had already borrowed 25 billion pounds ($49 billion) from the Bank of England after its funding model collapsed last year.


In fact, China's sovereign wealth fund, China Investment Corp, and China Development Bank, a state-owned lender to major projects, have both already suffered losses on overseas deals they made last year.

China Investment Corp's first U.S. investment, a near-10 percent stake in Blackstone that cost $3 billion, has lost about 40 percent of its value since the private equity giant's IPO in June, sparking fierce criticism in the Chinese media.

And China Minsheng Banking Corp has lost half of the value of its purchase of a 9.9 percent stake in San Francisco-based UCBH Holdings, which was the first time a Chinese commercial bank had invested in a U.S. bank.

"We made the investment in UCBH for a long-term and strategic purpose," Minsheng Bank's Chairman Dong Wenbiao told Reuters, though he acknowledged he was already under pressure from some of the bank's shareholders.

When JPMorgan Chase & Co announced its plan to bail out the troubled brokerage Bear Stearns Cos Inc, Chinese media celebrated CITIC Securities' good luck at avoiding a disastrous investment.

CITIC Securities, whose parent company is directly controlled by China's cabinet, would have lost most of its planned $1 billion investment to buy a stake in Bear Stearns, which is being sold to JPMorgan for only $2.1 billion, if Chinese regulators hadn't been slow to approve the deal.

As a result of that near-miss, Beijing has begun to tighten its approvals for overseas investments by Chinese financial institutions. Now, any foreign investment that is worth "a considerable amount of money" requires approval from the cabinet before a legal binding agreement can be reached, the sources said.

"We certainly will not buy into institutions like Bear Stearns," said Xiao Gang, chairman of Bank of China, China's fourth-largest bank by assets.

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