China Wins Financial Olympics as Credit Losses Hit U.S., Europe

By Cathy Chan
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Aug. 4 (Bloomberg) -- China already has won most of the medals in the financial Olympics by avoiding the toxic debt investments that devastated banks in the U.S. and Europe.

Chinese banks hold three of top six spots among the world's largest financial companies based on market value, even though their shares fell more than 20 percent in Hong Kong trading since October. London-based HSBC Holdings Plc, the biggest non-Chinese bank, is No. 3, trailing Beijing-based Industrial & Commercial Bank of China Ltd. and China Construction Bank Corp.

The Chinese banks owe their rankings in part to having avoided almost all of the $480 billion in writedowns and credit- market losses that have sent bank stocks tumbling worldwide, data compiled by Bloomberg show. Only two years ago, the world's biggest banks were led by Citigroup Inc. and Bank of America Corp. of the U.S. and UBS AG in Europe.

``Compared with the continuing writedowns at Citigroup and Merrill Lynch, Chinese banks are definitely winning the financial medals,'' said Shao Chingxiao, managing partner of SMC China Fund in Shanghai, which owns shares of China Construction Bank and Bank of China Ltd., the world's fifth-largest bank.

ICBC's unaudited figures released July 3 show first-half profit rose more than 50 percent. Three days later, Beijing-based China Citic Bank Co. said earnings jumped more than 150 percent in the same period. China Construction Bank followed, saying net income may have advanced more than 50 percent.

ICBC and China Construction Bank are the most expensive among the 15 largest global banks by market value, trading at 3.2 times and 3.4 times book value, respectively, according to data compiled by Bloomberg. That compares with New York-based Citigroup, which trades at less than 1 times book value. Bank of America in Charlotte, North Carolina, the world's fourth-biggest bank by market value, is at 1.07 times book value.

Morgan Stanley

China's success in growing its state-owned domestic banks hasn't been matched by its investments in overseas financial firms. Chinese funds and companies spent $19.3 billion buying stakes in Blackstone Group LP, Morgan Stanley, Barclays Plc, Fortis and Johannesburg-based Standard Bank Group Ltd. since May 2007 that are now worth $7 billion less on paper.

The sprint into overseas financial stocks culminated Dec. 19 with Beijing-based China Investment Corp.'s $5 billion purchase of a 9 percent stake in New York-based Morgan Stanley, the second-biggest U.S. securities firm.

Morgan Stanley has declined 18 percent in New York trading since then. The $200 billion sovereign wealth fund also invested $3 billion in shares of New York-based Blackstone, manager of the world's largest buyout fund, only to see their value decline 41 percent since the firm's initial public offering in June 2007.

Paper Profits

The losses may have deterred China from making further investments in overseas banks rocked by credit-market turmoil, said Howard Wang, who oversees $10 billion at JF Asset Management in Hong Kong.

``The whole world is so uncertain right now,'' Wang said. ``And the Chinese government is so afraid of a misstep that will draw criticism that it doesn't want to play.''

By contrast, foreign banks' investments in Chinese financial firms have fared much better, showing $50 billion of paper profits, according to Bloomberg data.

The biggest winner is HSBC, which traces its origins to 1865, when it was incorporated in Hong Kong as Hong Kong & Shanghai Banking Co. It bought 19.9 percent of Shanghai-based Bank of Communications Co. in 2004, the country's fifth-largest lender, and 10 percent of Shenzhen-based Ping An Insurance (Group) Co., China's second-largest insurer, in 2002, later increasing that stake to 17 percent. HSBC is sitting on a $16 billion gain from those investments.

`A Marathon'

Bank of America, which bought 9 percent of China Construction Bank for $3 billion in 2005, has a $14 billion paper profit, Bloomberg data show.

For both China and non-Chinese banks, the value of their investments isn't measured only by stock price. Foreign banks are positioning themselves to sell services into the world's most populous country, where economic growth is above 10 percent.

Chinese banks and sovereign wealth funds, flush with cash, are eager to build their portfolios overseas and prove that China can compete on a global stage, said Richard Gibb, Asia head of financial-service investment banking at Merrill Lynch & Co. in Hong Kong.

``This is a marathon, not a 20-yard dash,'' Gibb said. ``The trend of Chinese institutions investing overseas will continue.''

Charles-Everard de T'Serclaes, who heads New York-based JPMorgan Chase & Co.'s insurance business in Asia, also said China has a long investment horizon.

Merrill's Slump

``They are now significant strategic investors in global financial institutions,'' de T'Serclaes said. ``This is a major shift from four to five years ago, when they were mostly recipients of international capital.''

While the Hang Seng China Enterprise Index, comprising 42 Chinese companies traded in Hong Kong, fell 22 percent this year, bank stocks outperformed. Of the four companies on the index that gained since Dec. 31, three are banks. ICBC climbed 5.4 percent, China Construction Bank rose 5.6 percent and China Citic Bank advanced 2.3 percent.

By contrast, Merrill Lynch, the third-biggest U.S. securities firm by market value, has slumped 50 percent in 2008 in New York Stock Exchange composite trading. Merrill raised $8.5 billion on July 29 by selling shares to investors including Temasek Holdings Pte., following almost $19 billion of losses in the past 12 months.

Temasek, Singapore's sovereign wealth fund, agreed to buy an additional $3.4 billion of Merrill shares, cementing its status as the firm's biggest stockholder. It also received a $2.5 billion payment from New York-based Merrill to offset losses on an earlier investment.

Slowdown in Investing

China, unlike Singapore, has slowed its investments in overseas financial companies. China Development Bank's and Ping An's purchases of additional shares in London-based Barclays and Fortis, Belgium's biggest financial-services company, were the only such investments this year.

The government blocked plans by Beijing-based China Development Bank to invest in Citigroup because of the U.S. bank's mortgage-related losses, a person with knowledge of the decision said in January. At almost $103 billion, Citigroup's market value is less than half of China Construction Bank's.

``They, like anyone else, are scared,'' said Glenn Henricksen, chief financial officer of Vestasia Ltd., a financial advisory firm in Shenzhen, China. ``Look at what's going on with financial institutions around the globe.''

Olympic Moves

Chinese banks may not be as well off as they seem, according to Henricksen. A drop in real estate prices in Shenzhen and other cities, along with the government's decision to raise reserve ratios, don't bode well, he said.

``I expect the credit quality of the banks' portfolios to deteriorate significantly,'' he said. ``They're going to find they have a lot of questionable assets on the balance sheet.''

Henricksen said he doesn't expect Chinese banks to announce any bad news until after the Olympics.

Bank of China, the only lender that's an official sponsor of the Summer Games, which begin Aug. 8, has set up five temporary outlets in Beijing, four in Qingdao and one in Hong Kong. It installed 2,500 point-of-sales terminals in Olympic venues, hotels and athletes' residential areas, and its outlets can now handle conversions for 14 foreign currencies, compared with the usual eight.

ICBC, which has a market value of almost $250 billion, has 4,613 automatic teller machines in the six co-host cities and has set up a task force of 60 managers to handle calls from customers in six foreign languages.

The Olympics aren't ``just a strict test to the quality of Chinese banks' internationalized services,'' ICBC said in a July 28 statement, ``but a stage to project their brand images.''

To contact the reporter on this story: Cathy Chan in Hong Kong at kchan14@bloomberg.net