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Money power

Updated: 2013-04-12 10:08
By Andrew Moody and Hu Haiyan ( China Daily)

 Money power

Junheng Li, founder of J.L. Warren Capital, believes there are concerns about corporate governance with Chinese banks. Cui Meng / China Daily


May Yan, director and head of China banks research for Barclays in Hong Kong, says it is a major challenge for Chinese banks to become dominant in overseas markets since very few foreign banks have succeeded before with this strategy.

"If you look at commercial bank history, not many have been very successful at becoming global banks. HSBC is perhaps the exception. The Spanish banks have been big in Latin America but not in the United States. Most banks are stronger in their home markets than they are globally."

Yan says a salutary lesson for China is Japan whose banks have attempted to become dominant international players for 30 years but have largely failed.

"Nomura, for example, has made a number of bad decisions. It was in CMDs (commercial mortgage-backed securities), the structured products business and the commercial real estate business. It went into all of these aggressively trying to make money and then there was always a blowout," he says.

Martin Jacques, a leading China commentator and author of When China Rules the World, questions whether it is actually desirable for China to take on the mantle of a financial superpower.

"China is going to become the major financial power. It is inevitable almost but there are major risks.

"What happened to Britain from the middle of the 19th century is very instructive. As the City of London grew and became the financial center of the empire, industrial interests became subordinated to the financial interests, with malign consequences for the economy over the next century."

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Jacques says the problem for China is that it doesn't have the option that Germany has had - to focus mainly on manufacturing and opt out of becoming dominant in financial services.

"Germany didn't develop a financial sector, and its currency was never dominant in the West. China's economy is going to be far bigger, and it has to inevitably develop a large financial sector. It shouldn't, however, lose sight of how important its industrial base is."

If Chinese banks are going to be the next big thing, not all investors are buying into the growth story.

The recent trend in the United States has been for investors to sell their Chinese bank holdings.

Goldman Sachs sold a $2.3 billion stake in Commercial Bank of China last year, following the sale of a similar holding in ICBC.

Bank of America has raised cash by selling parts of its stake in China Construction Bank, and ICBC recently offloaded its shares in Shanghai Pudong Development Bank.

 Money power

May Yan, director and head of China banks research for Barclays in Hong Kong; Mark Boleat, chairman of the policy and resources committee of the City of London; and Oliver Rui, professor of finance and accounting at CEIBS. Provided to China Daily

While some of these sales were about raising cash, Junheng Li, founder of J.L. Warren Capital, the New York-based equity analyst firm and author of the forthcoming book, Tiger Woman on Wall Street - Winning Strategy from Shanghai to New York and Back, believes there are still concerns about corporate governance with Chinese banks.

"The Americans view Chinese banks like an opaque black box, and as shareholders they don't feel that their rights are looked after. To be a leader in financial services, one has got to grow brand equity. For that, Chinese banks need to improve corporate governance and transparency," she says

Oliver M. Rui, professor of finance and accounting at CEIBS, believes the Chinese banks still have got a long way to go before they start to compete with big international banks. He insists, however, that whether China becomes well known for being an international financial services provider or not, its banks hold the key for the future success of the economy.

"Finance is the engine for the next phase of China's economic development. Without the cheap costs of capital, it is going to be difficult to sustain a high growth rate," he says.

"Banking reform is critical to that. It is not just vital for building up the financial services sector but the key to developing the economy overall."

Contact the writers at andrewmoody@chinadaily.com.cn and huhaiyan@chinadaily.com.cn.

Money power

(China Daily 04/12/2013 page1)

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