/ 20 December 2011

ICBC sets up in Standard’s back yard

Icbc Sets Up In Standard's Back Yard

Standard Bank’s foreign shareholder, the Industrial and Commercial Bank of China (ICBC), has 107-million individual internet banking customers — more than double the number of people in South Africa.

Despite the size of this banking behemoth (it is the world’s largest bank by market capitalisation), it opened its African representative office in Cape Town recently with rather muted formality.

The ICBC paid $5-billion in 2008 for a 20% stake in Standard Bank, South Africa’s largest bank in terms of assets. But the decision to set up its own office has caused some confusion, given Standard Bank’s extensive footprint on the continent. “We don’t understand what this is really about,” said a local banks analyst who did not want to be named.

Standard Bank has until now been assisting the ICBC and its Chinese corporate clients in its financial dealings in Africa, making it unclear what necessitated the need for an individual branded presence.

But, during his quick visit recently, ICBC chairperson Jiang Jiangqing quashed speculation that the bank is on an acquisitions hunt in Africa for other African banking assets. He added that ICBC was not planning to up its stake in Standard Bank.

The choice to establish the office in Cape Town rather than Johannesburg is interesting, given Gauteng’s status as the economic heart of South Africa.

“Cape Town is one of the economic centres of South Africa. It is also the legislative capital,” said Jiang.

There is no doubt that the new office will serve as a base from which to launch the ICBC into Africa. But the move speaks to a shift in terms of the type of Chinese capital moving into Africa — a process that began with the Standard Bank deal, according to local experts.

Before the ICBC’s arrival on the continent, much of the Chinese capital flowing into Africa has been through Chinese policy banks such as the China Development Bank and the Export Import Bank of China, as well as the China Africa Development Fund.

“We’re witnessing the diversification of Chinese investment in Africa,” said Martyn Davies, chief executive of Frontier Advisory, a capital strategy and research firm. “The Chinese are actively seeking to invest in manufacturing in Africa.”

For some time China’s presence in Africa has been associated with resource extraction and the need to feed and provide power to its one-billion-strong nation.

But at the opening of the ICBC’s office Jiang was swift to point out that this was not the aim of the projects in which it has participated with Standard Bank.

The two banks have provided a syndicated loan to Ghana’s cocoa board that allows pre-shipment financing for the export of its products and have also been involved in two electricity projects: financing a 600-megawatt coal-fired power station in Botswana and an electricity transmission grid in Zambia. They have also funded the building of a freeway in Nigeria.

“The ICBC is interested in introducing Chinese companies to set up factories in Africa to help countries establish their own manufacturing base and help create more jobs in those markets,” said Jiang. “It’s our hope that the ICBC will work closely with Standard Bank to provide financing to Chinese SMEs [small to medium enterprises] to make investments in Africa.”

The continent may also be a platform for internationalising China’s currency, the renminbi, according to a recent research paper by Standard Bank economist Jeremy Stevens and analyst Simon Freemantle.

Although the notion has caused much debate internationally, trade with Africa could be an area in which the renminbi could flourish, the research indicated.

Chinese capital
There are an estimated 1 500 Chinese firms operating in 18 markets in Africa and about one million Chinese people live on the continent. These expats would want to open renminbi accounts, use renminbi products, or send the currency home.

Standard Bank conservatively estimates that 40% of Sino-African trade, worth about R100-billion, could be settled in renminbi by 2015.

Davies pointed out that Chinese capital going abroad, although advancing, is still in its early stages. It is hardly surprising, given the careful capital controls China’s central bank has in place and the sheer size of the country’s internal market.

It is one of the reasons China’s banks have been immune to the debt crisis in Europe, said Davies, adding that public opinion in China is against the use of taxpayers’ money to invest in the West’s toxic debt.

But Chinese banks do have their own set of woes. In a post-financial crisis credit boom they lent heavily to local-authority development institutions and these loans have now become non-performing.

This is among some of the major imbalances in the Chinese economy that are fuelling concerns about a lower-than-expected 7% gross domestic product growth in the first quarter of next year.

Local governments, according to a new research note, have accumulated debt rapidly, rising from 17% of GDP to about 36% in two years.

The unsustainable role of local-government financing platforms has accumulated $1.7-trillion in building infrastructure projects, much of it financed through banks.