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Clamour to boost China stakes reveals Japan anomaly
David Ibison from Tokyo
10/29/2005
The list of international banks that have acquired stakes in Chinese lenders is growing longer by the day and includes many of the best-known names in global finance, such as Bank of America, UBS and Royal Bank of Scotland. But it is a list that has one glaring anomaly -- there are no Japanese names.
The world's banks are building direct stakes in Chinese lenders ahead of their 1POs in an attempt to participate in the country's emerging domestic wholesale and retail financial services markets. Their aim is eventually to be able to provide corporate and retail banking services straight to Chinese customers.
Japan's three mega-banks, MUFG, Mizuho and SMFG, are some of the world's largest and most have expressed an interest in competing on the global stage in coming years. So why are they letting the chance to participate fully in China's economic transformation pass them by?
The explanation encompasses business, politics and history, and is in many respects a case study of how these three factors can intertwine with unhealthy consequences in Asia.
Japan's largest banks do have a limited presence in China, operating branch offices in most of the major urban centres and representative offices in other large cities. But their primary role is to provide wholesale banking services to Japanese companies doing business there.
"We are mainly chasing domestic [Japanese] clients active in China," said a spokesman for Mizuho, Japan's second-largest bank. A spokesman for MUFG, the world's largest bank by assets, said: "Our focus is commercial banking."
Part of the reason Japanese banks have not moved beyond this limited focus is they have been busy dealing with problems at home.
Brett Hemsley, senior director at Fitch, the credit ratings company, said the major banks still owe Japanese taxpayers' money after they were bailed out by the government in the late 1990s. "If they had any spare capital there would be political pressure for them to give back the money first rather than go to China."
He added that Japan's banking crisis has left its banks under-capitalised at a time when their international rivals are well-capitalised and prepared to invest huge sums to secure a presence in China. "In a bidding war, it is likely the Japanese would not be able to outbid them," he said.
Further hurdles have arisen from the problematic history between Japan and China. Anti-Japanese riots in China in April, which targeted many Japanese companies, argued against building a highly-visible retail presence in China, Japanese bankers said.
Analysts said Chinese banks were also reluctant to join forces with a Japanese partner because of the two countries' difficult past especially when there was a long list of alternative, non-Japanese partners.
But Rieko McCarthy, credit analyst at Morgan Stanley, said that, as the sector recovered, it would only be a matter of time before Japanese banks started looking overseas for acquisitions, including possibly in China.
"Japanese banks' recovery in economic capital will lead to their aggressive return to international markets," she said. At that point, the question will be how many suitable acquisition targets will be left in China, given the recent flurry of tie-ups between US and European lenders, analysts said. A long delay could represent a significant opportunity loss for Japan's banks, they cautioned. While they are in better shape today than they have been for years, Japanese banks still have serious problems, particularly in generating profits. Margins on domestic corporate and retail lending are slim, at about 100 basis points, while margins available in China would be much higher, especially given Japan's low cost of capital.
"Japan is a mature banking market -- there aren't that many opportunities," said Mr Hemsley.
"Whereas just across the Japan Sea is an obvious dynamic market."
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Exclusive to FE under syndication arrangement
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