It’s rare that a business deal intrigues investors and political scientists alike. Industrial and Commercial Bank of China Ltd’s move to buy 20% of Africa’s largest bank is such a transaction.
It’s the biggest overseas investment by a Chinese company, in this case the world’s No.1 bank by market value. The Chinese bank’s $5.6 billion (Rs22,008 crore) purchase of the Standard Bank Group Ltd stake is the largest in South Africa since apartheid ended in 1994. Yet, there’s something even bigger at play here. This is arguably the first Chinese investment in Africa that doesn’t carry a whiff of political strategy. Nor is it directly related to China’s desire for resources, which can often help despots more than African households. Industrial and Commercial Bank’s Standard Bank deal may be the watershed that begins propelling China’s designs on Africa from talk to just plain business, and smart business at that.
“From the regulators’ point of view, this kind of diversification is a great idea,” says Michael Pettis, a finance professor at Peking University. “Chinese banks are too highly concentrated in China and it’s not in their best interest that banks depend exclusively on Chinese growth. That kind of dependence is highly pro-cyclical and can feed booms and busts.” Standard Bank has offices in 18 African countries, including Nigeria and Kenya, and 21 other nations such as Argentina and Taiwan.
The Johannesburg-based bank has 713 branches in South Africa and 240 throughout the continent. The deal is a sign that even if the Chinese Communist Party has strategic reasons for investing in Africa, companies are heading there for the economic potential.
Until now, China’s Africa push has raised warning flags around the globe, and rightfully so. To get resources to feed its 11.5% growth, China has hopped into bed with some of Africa’s most unsavoury regimes, such as Sudan’s and Zimbabwe’s. That see-no-evil-hear-no-evil approach is raising eyebrows. Warren Buffett can deny it all he wants, but it’s hard to believe that his Berkshire Hathaway Inc. would have dumped its entire holding of PetroChina Co. Ltd, Asia’s biggest oil company, without the public criticism over China’s support of Sudan.
PetroChina’s state-controlled parent is the biggest foreign investor in Sudan. PetroChina’s stock gained more than 11 times since Buffett first bought it in 2003. And yet he recently abandoned what he says is “absolutely a first-class company”. Buffett was under increasing pressure from human rights groups over accusations that the Sudanese government supports genocide. There was even a role for actress Mia Farrow, who helped publicize the worldwide campaign to dub next year’s games the “Genocide Olympics”.
Industrial and Commercial Bank’s stake in Standard Bank comes without that kind of baggage. It’s a state-controlled China bank, making it hard to figure out where politics ends and business begins. Yet the deal shows China is now making bets on Africa’s economy.
Standard Bank is gaining access to the fastest growing major economy and fattening its capital base. China is getting a foothold into Africa’s nascent investment banking and insurance industries. It’s also a way for China to use its growing cash piles overseas rather than making fresh domestic loans that may go bad or fuel inflation. All this is stellar news for Africa, which usually suffers from the “paradox of plenty”. All too often, inhabitants of resource-rich nations fail to prosper while corrupt politicians and their cronies get wealthy and ignore the development needs of the struggling masses. That has been Africa’s experience for far too long. And the failure of Western efforts to reverse the dynamic left the region’s leaders open to Chinese investment.
One interesting element of Industrial and Commercial Bank’s deal is how different it is from the usual overture from Western banks. It didn’t come laden with demands about how much control the lender will have over Standard Bank. It didn’t require pledges for financial change. It’s merely one bank buying a piece of another with transparent terms and conditions. It’s a sign Chinese managers are willing to treat Africans as peers.
The West hasn’t learned that lesson with its aid programmes and lecturing. By trying a new tack, China may be testing what development economists have argued for years: Africa doesn’t need more aid, it needs more genuine investment and trade. U2’s Bono and Columbia University’s Jeffrey Sachs will keep plugging away, and thank the gods for that. Africa represents huge and lucrative business opportunities if it gets its act together. That’s a big “if”. With the exception of Botswana and Ghana, Africa’s biggest consistency seems to be to pull the rug out from under wide-eyed investors. China’s interests are offering Africa a rare opportunity to boost its economies.
Looking at Industrial and Commercial Bank, along with other Chinese deals of late, such as Citic Securities Co. buying a stake in Bear Stearns Cos Inc., it’s clear something transformational is afoot. China used to seek foreign investments in financial firms to shore up capital and gain expertise. Now, cash-rich from trade, stock offerings and surging share prices, China no longer needs Wall Street’s money. Increasingly, it’s foreigners who want a cut of China’s money. Bloomberg
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