Sun, Oct 23, 2005 page12

• US and European banks catch a case of China fever

  After staying on the sidelines of China's problematic banking sector; Western firms have taken a headlong plunge

  • NY TIMES NEWS SERVICE
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  After years of hesitance and half-hearted attempts to break into the Chinese market, US and European financial services companies are investing billions of dollars here in the hopes of reaping huge profits from China's dramatic rise.

  Wall Street firms and some of the world's biggest banks and insurance companies, including Bank of America and American Express, have already invested more than US$20 billion during the last three years in joint ventures or strategic stakes in dozens of Chinese banks, brokerage houses or insurance companies.

  And with China promising to further reform and open its financial markets, some of world's biggest stock and futures exchanges, including the New York Stock Exchange, NASDAQ and the Chicago Mercantile Exchange, are convinced that a growing number of big stock listings and futures or derivatives trading will soon come from China.

  This year alone, Bank of America put US$3 billion into the China Construction Bank; a group of investors led by the Royal Bank of Scotland and Merrill Lynch invested US$3.1 billion in the Bank of China; a Goldman Sachs-led group is investing US$3 billion in the Industrial and Commercial Bank of China; and Temasek Holdings of Singapore has agreed to invest about US$5 billion in two Chinese banks.

  focus on china

  The accelerated push acknowledges that China has become a focal point of the global economy. It is the world's fastest-growing major economy, and its huge trade surplus and large foreign currency reserves are solidifying its status as an economic superpower.

  Of course, China's financial markets are still relatively immature. Its banking system is rife with corruption, and corporate governance is poor; its stock market is depressed and seemingly broken; its brokerage houses are insolvent; and its managed currency elicits outrage overseas because of trade disputes.

  And yet, there is a growing sense around the world that now is the time to invest in China or to begin creating a platform to offer financial services products and lay the groundwork for more cross-border deals with the Chinese.

  "Everyone's jockeying to get a piece of what they hope is the big growth industry," says Jonathan Anderson, chief Asian economist for UBS.

  One indication of the importance of the marketplace here were the visits to Beijing this week of Alan Greenspan, the Federal Reserve chairman; Treasury Secretary John Snow; the chairman of the Securities and Exchange Commission, Christopher Cox; and the chairman of the Commodity and Futures Trading Commission, Reuben Jeffery III.

  The delegation of government officials and executives repeatedly referred to the dramatic changes that have taken place in China.

  They praised the Chinese government and said they expected further openings as China moves toward becoming a full-fledged market economy. They also met with China's top leaders, including Prime Minister Wen Jiabao (溫家寶) and the head of China's central bank, Zhou Xiaochuan (周小川).

  But the US officials also pressed for China to further appreciate its currency, and lift restrictions on foreign investing in China, like limits on stakes in brokerage firms and banks.

  "We clearly see the momentum," Marc Lackritz, president of the Securities Industry Association, said here. "In the long run, this is the growth opportunity."

  realization

  Underlying the visit to Beijing this week of so many high-level US officials is a realization that the US trade deficit is widening, and that, to some degree, the purchase of US homes and sport utility vehicles is being partly financed by China, which is using its huge foreign exchange reserves to purchase US Treasury notes, thereby holding down interest rates.

  For years, of course, big banks, insurance companies and Wall Street firms have been coming to China seeking riches. But very few of them have returned big profits; most have been disappointed by China.

  During the last few years, however, deals like Lenovo's acquisition of IBM's personal computer unit and Yahoo's US$1 billion cash investment in Alibaba.com, as well as this year's banking rush, suggest that China has turned a corner.

  The list of big investors is becoming more impressive. Lately, officials from Citigroup, ABN Amro, Deutsche Bank and BNP Paribas have been prowling China for financial services investments, and committing billions of dollars to new deals. Allianz of Germany and HSBC are moving to enter China's credit-card market. The New York Stock Exchange and NASDAQ are scouting for new stock listings. And a few weeks ago, the Chicago Mercantile Exchange, one of the world's biggest futures and derivatives exchanges, played host to a conference in Shanghai.

  bubble warning

  Still, many analysts are already warning of a bubble here. They say, often privately, that venture capital firms, banks and others are bidding up the prices of Chinese assets to ridiculous levels; that major companies are putting staggering amounts of cash into risky ventures with suspect books.

  Everyone, they say, is traveling to China these days. And everyone in the financial services world seems to have caught China fever.
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