China Banks' Overseas Assets

Chinese Banks Cut Fannie, Freddie DebtSeptember 3, 2008; Page C2

SHANGHAI -- China's big banks, having trimmed their holdings of U.S. mortgage-related debt, are facing increasingly difficult decisions about how to invest their sizable foreign-currency holdings.

Amid jitters about the future of Fannie Mae and Freddie Mac, China's four biggest listed banks have pared back their holdings in debt related to the two U.S. mortgage giants. At the end of June, the four banks held a combined $23.28 billion of debt issued or guaranteed by Fannie and Freddie. That's a small fraction of the trillions of dollars outstanding, but the reductions attracted interest as a possible gauge of broader sentiment toward such securities.
In earnings conferences in recent days, several Chinese banks said they had trimmed their Fannie and Freddie portfolios since June. Bank of China Ltd., by far the largest holder of Fannie and Freddie securities among the four big banks, said it had sold or allowed to mature $4.6 billion of the $17.3 billion it held as of June 30 -- which was down from more than $20 billion at the end of last year.

China Construction Bank Corp. said it had cut its Fannie and Freddie holdings to just above $2 billion by the end of July, down from $3.2 billion a month earlier. Bank of Communications Co. sold all of its $27 million in holdings in early July. Industrial & Commercial Bank of China Ltd., the country's biggest lender, said it held $2.7 billion worth of Fannie- and Freddie-related debt at the end of June, but didn't provide a comparison with previous months.
Analysts said the banks were likely erring on the side of caution, paring their holdings to please investors and ease concerns about their earnings outlook. While Fannie's and Freddie's shares have been battered this year, their debt generally is still considered relatively low-risk.

Zhang Jianguo, Construction Bank's president, told reporters last week that bonds issued by Fannie and Freddie are still "relatively safe." The U.S. government "has already made clear its guarantee" of the two companies' debt, Bank of China President Li Lihui said. Zhu Min, a Bank of China vice president, said the company "will adopt a cautious stance" in managing its foreign-exchange assets amid global economic weakness.

The shift away from Fannie and Freddie debt further reduces an already dwindling array of attractive foreign-currency investment options, with meager returns on low-risk instruments like U.S. Treasuries and continued instability in major stock markets. Because most developed economies are expected to slow further this year, the global investment climate is unlikely to improve soon, analysts said.

China's banks have significant overseas funds to deploy. Bank of China had $240 billion of overseas assets at the end of June, while the other three big lenders had a combined total of $219 billion.

Some analysts said they see merit in Chinese banks expanding their foreign-currency loan businesses. They have lots of liquidity as many Western institutions are squeezed by the credit crisis, so the Chinese banks may be able to pick up market share in lending to attractive companies.

"They have to deploy their liquidity in some way and at the moment Treasurys don't look very lucrative," said Warren Blight, a banking analyst at Fox-Pitt, Kelton (Asia) Ltd. "But with credit so scarce, they can do a bit more syndicated lending or even direct corporate lending as yields and spreads are getting more attractive on that front."

Syndicated lending is one of the few bright spots in the banking business, analysts said, in part because borrowers have shied away from issuing debt in the face of higher yields. Using more of their overseas funds for corporate lending would help build Chinese banks' international experience.

"Given the fact that a lot of Chinese companies are seeking overseas expansion, it's a good opportunity for cash-rich big Chinese banks to develop a syndicated-loan business," said She Minhua, a banking analyst at China Securities Co.
Bank of China set up three centers earlier this year to manage its syndicated-loan business around the world. It has been involved in a handful of small but noteworthy syndicated-loan deals, including a $592 million deal in Indonesia in which it led a group of 17 other banks to finance a power project. Its BOC Hong Kong (Holdings) Ltd. unit participated in a planned $3 billion refinancing facility for telecom operator PCCW Ltd.
--Rose Yu and Amy Or

URL for this article:http://online.wsj.com/article/SB122037859304991457.html

Intel Launches New China VC Fund

From today's WSJ:

Intel Corp.'s venture-capital arm has completed its first round of investment in China and plans to invest another $500 million in the country over the next several years, executives said.



Intel Capital, the Santa Clara, Calif., chip maker's investment unit, has created the new $500 million fund to focus on technology startups at varying stages, including companies working with wireless broadband, technology media and telecommunications, Arvind Sodhani, the unit's president, said in an interview Tuesday. It is the largest country-focused fund for Intel Capital globally.



Intel plans to fully invest the new fund in three to five years, and is betting China will continue to grow even as other economies slow. When the economy takes a downturn "the natural reaction of investors is not to invest in technology or entrepreneurship," Mr. Sodhani said. But "technology is not really driven by what the state of the markets are at any point in time," he said, adding that "China is on a track all its own. Its economy is growing at a spectacular rate."



Intel Capital has been investing in China for 10 years, and established its first China-focused fund, with $200 million, in 2005. The announcement of its new fund comes as China's technology market is rapidly expanding. The country is the world's largest cellphone market by number of accounts and, by some estimates, surpassed the U.S. this year as the largest Internet population. Personal computer sales are growing at double-digit rates annually, and online services like video-gaming are booming.

Wamu target for Chinese banks?

Many Chinese banks are flush with capital and aggressively seeking growth opportunities overseas. The strengthening RMB only makes a U.S. acquisition more appealing. Wamu, despite its potential liabilities, would seem to be a prime target. Why? Here's what Bill Virgin at the P-I has to say:

What would an acquirer get? An established retail banking, credit card and home-loan company with a network of 2,200 branches stretching from California to New York and Seattle to Miami.

Here's the entire article from the Seattle P-I.

China to launch market for small companies in Shenzhen

The Shenzhen Stock Exchange is starting a "NASDAQ-like growth enterprise market" to help smaller companies raise capital. It plans on competing with NASDAQ, London AIM and other markets. First IPOs could be as early as May 2008. Details from WSJ plus possible IPO candidates and reference data from peers around the world below.

The Shenzhen exchange won't identify early listing candidates for the GEM. Analysts point to several companies operating from a high-technology industrial zone outside Beijing known as Z-Park, for Zhongguancun Science Park.



"We are surely to be in the first batch," said He Yuanping, a vice general manager of Beijing Origin Water Technology Co., which makes industrial sewage-treatment equipment. Mr. He, who is in charge of the GEM listing effort, said Origin Water has received a "positive message" about a listing from officials of the Shenzhen exchange and Z-Park management.



Another hopeful is two-year-old Beijing Techshino Technology Co., which develops fingerprint-, face- and eye-recognition systems. The company should qualify for a listing with annual revenue in the neighborhood of 40 million yuan and is overhauling its shareholding structure, said Zhou Jun, general manager.

Haier in the US: Struggling but undaunted

Haier launches new high end refrigerator at its US plant just as economy hits the skids. But adapting to US business culture has also posed challenges. Yet, Zhang Ruiming, Haier's CEO, intends to persevere. "First the hard, then smooth. That's the way to win," he says.





From today's WSJ:

The new refrigerator, which allows consumers to set specific temperatures for individual compartments, was designed and built at Haier's South Carolina factory, at 10 times what it would cost the company to make in China.



The downturn in the U.S. economy crimped consumer demand just as the company's most-expensive U.S.-made products came on the market.



At the same time, Haier's rigid, top-down management structure fell flat with American workers accustomed to a less-authoritarian style.



For Haier, which had $15 billion in revenue world-wide last year, a delay in getting its new refrigerator to market meant that it arrived just as the U.S. economy was turning south. A series of recalls for China-made products last year, which have heightened quality concerns about Chinese manufacturing, compounded the company's challenges. And the new fridge's design simply hasn't set it apart from models by better-known competitors, appliance buyers say.



Known for sage-like sayings and for idiosyncrasies such as the flying-saucer-shaped tower he had built at one of his plants, Mr. Zhang insisted that Haier press on with its global expansion. "First the hard, then smooth. That's the way to win," he says.

It's Official: Bear Citic deal nixed

From today's WSJ:

HONG KONG -- China's Citic Securities Co. Tuesday dropped plans for a $1 billion cross-investment with Bear Stearns Cos. in the wake of J.P. Morgan Chase & Co.'s deal to take over Bear.

Bank of China seeks growth through acquisition

Can't get much clearer than that.



From Bloomberg:

``Mergers and acquisitions are an important part of Bank of China's overseas expansion strategy, and we are actively seeking takeover targets abroad,'' said Wang Zhaowen, a Beijing-based spokesman for Bank of China, the nation's third-largest.

CITIC to invoke MAC clause?

Back in October last year, Citic Securities announced it would buy up to 9.9% of Bear Stearns. This would have been a landmark deal but, given Bear's current troubles, it will be surprising if Citic doesn't bail.



From 10/23/2007 Washington Post

NEW YORK, Oct. 22 -- China's Citic Securities would acquire up to a 9.9 percent stake in Bear Stearns under a joint venture that marks the first time an entity controlled by the Beijing government has obtained a significant stake in a major Wall Street investment bank.



The two firms would invest about $1 billion in each other, sell financial products in China and start a Hong Kong-based joint venture offering financial services in other Asian markets.



"Citic invests in energy and other sectors, but this is a major step so far in investing in the financial services area," said Wenran Jiang, director of the China Institute at the University of Alberta in Canada. "The simple fact is that there is a lot of cash flowing around. The basic law when you have so much surplus capital is just to go diversify and look into the big guys overseas."

China makes hostile bid for iron ore in Australia

On the one hand, the increasing wealth and financial sophistication in China makes further hostile cross-border M&A bids more likely. Offsetting this, in the U.S. at least, is negative political sentiment.



Geopolitically, massive Chinese investment in Australia must be troubling for those tasked with sustaining American influence in the Asia-Pacific region.



Yet another interesting sitution that bears closer attention.



From today's WSJ:

MELBOURNE, Australia -- In China's first hostile bid for an Australian company, Sinosteel Corp. launched a cash bid for iron ore miner Midwest Corp. that values the target at A$1.2 billion (US$1.1 billion).



The move illustrates China's strong desire to get a foothold in Australia's resource sector as demand, and prices, for raw materials surge. It also comes as big miners BHP Billiton Ltd. and Rio Tinto PLC squeeze Asian steel mills for a 71%-plus rise in iron ore contract prices.



"It's time Midwest shareholders had the opportunity to decide for themselves the value of their investment in Midwest," Sinosteel President Tianwen Huang said.



If the bid is successful, it will be China's first hostile takeover of a foreign company, according to data supplied by Dealogic, but not its first attempt.

PRC Pharma R&D group makes US acquisition

Another example of the consummation of Chinese ambitions to acquire both technical expertise and market access, this time in pharma.

WuXi PharmaTech (NYSE: WX), China's premier provider of pharmaceutical R&D outsourcing services has signed a definitive agreement to acquire US-based AppTec Laboratory Services, Inc. (AppTec).



The acquisition of AppTec allows WuXi PharmaTech to immediately obtain biologics capabilities and expertise, gain a significant U.S. operational footprint, and expand its customer base and addressable market size.



The combined business operations of WuXiPharmaTech and AppTec in both the U.S. and China will enable WuXi PharmaTech to provide a full service suite of outsourced chemistry and biology services to global pharmaceutical, biotechnology and medical device clients.



The transaction consideration totals approximately $151 million and the assumption of debt held by AppTec totaling approximately $11.7 million.

Shenzhen med device company buys sales network in US for $202 million

As I've said elsewhere, companies with established sales (and distribution) networks in the U.S. will become increasing attractive acquisition candidates for Chinese firms looking to access what is still, by far, the biggest market in the world.



From 3/11/2008 WSJ:

Mindray Medical International Ltd., one of China's top medical-device makers, will acquire Datascope Corp.'s patient-monitoring business for $202 million, Mindray said, securing a foothold in the U.S. market as the company strives to become an international competitor.



The deal between Mindray, of Shenzhen, and Datascope, of Montvale, N.J., comes as Chinese health care companies increasingly look to overseas markets to build on profits made on low-cost manufacturing at home.



The purchase of the Datascope business, which had revenue of $161.3 million last year, will give Mindray access to Datascope's network of sales and service representatives, some 90 people who peddle the company's products to hospitals and surgery centers across the U.S. Building that kind of network from scratch would have been a challenge, said Joyce Hsu, Mindray's chief financial officer, who confirmed the deal.

China signs investment MOU with WA State

This is an early step in the PRC government's policy of promoting outbound investment. Like most policy decisions taken by the PRCG, this is likely to have a big effect on China and the world.



From 5/12/2007 Seattle Times:

More than 50 government and business leaders from China visited Seattle on Friday, part of a multibillion-dollar buying-and-investment mission paving the way for a major meeting between the U.S. and China later this month.



Earlier Friday, Gov. Christine Gregoire met the group in Olympia during the signing of a memorandum of understanding to enhance cooperation between Washington and China.



State officials believe it is the first bilateral agreement between a state and the Chinese government.



Officials from China's Ministry of Commerce signed an agreement with the state's Community, Trade and Economic Development office to promote two-way investment.



Wang Chao, assistant minister of the Ministry of Commerce, said he hoped the agreement would help usher in deals aimed at expanding imports from the U.S. and Chinese investment to the U.S.



China has become the largest export market for Washington state, with exports totaling $7 billion last year, he said.



Wang said Chinese companies such as shipping giant Cosco, China National Petroleum Co. (CNPC), Haier and Huawei have all invested in the U.S.

Chinese company buys Seattle consulting firm

Given the enormous liquidity in China plus the fierce urgency with which many Chinese companies want to climb the techology and marketing ladder, this is just the beginning of a powerful cross-border M&A trend.



This is also noteworthy because it signals a dawning appreciation among Chinese business people of the value of professional services and other intangible assets.



Here's the official press release:

Beijing, China and Seattle, Wash. — Feb. 28, 2008 — Today iSoftStone Information Service Corporation (iSoftStone) and Akona Consulting announced they have finalized an agreement whereby iSoftStone will acquire Akona Consulting, a business and technology consulting firm headquartered in Seattle, Wash., USA. With the acquisition of Akona, iSoftStone will significantly grow its United States operations and expand its core offerings into strategic business services which include research, business strategy, and interactive design.




“This combination allows us to strategically expand our business through Akona’s well respected presence in the United States,” said T.W. Liu, Chief Executive Officer of iSoftStone. “Our customers are continuously asking us to provide a combination of off-shore technology capabilities as well as local, on-site business consulting services. As such, we look forward to expanding our presence through Akona’s business service offerings as we grow globally, particularly in the United States and Europe.”