citic.jpgBBVA,
Spain's second-biggest bank, has agreed to invest €989m in China's
Citic Group in a bold move designed to take advantage of the
liberalisation of China's banking industry, which takes effect on
December 11.

BBVA will pay €501m for a 5% stake in China Citic Bank and €488m for
a 15% holding in Citic International Financial Holdings. The agreement
also includes an option allowing BBVA to raise its stake in China Citic
Bank to 9.9%.

Citic International Financial Holdings currently owns 16.4% of Citic
Bank, which has 416 branches. The sale of the stake to BBVA paves the
way for Beijing-based Citic Bank to raise $2bn in an IPO in Hong Kong.

BBVA's China strategy has changed significantly in recent months.
Given Spain's limited trade links with Asia, BBVA has historically
chosen to focus on other regions of the globe, most obviously Latin
America. China was seen to play a minor role with BBVA's presence
limited to representative offices and a handful of branches for
specific opportunities such as trade finance.

But over the summer, the bank has woken up to the need to have a
strategic presence in China, not least because of the growing trade
flows between China and Latin America.

Foreign banks like Bank of America, UBS and RBS have spent more than $18bn in the past two years expanding in China, according to Bloomberg.

A consortium led by Citigroup last week signed a $3.1bn deal
to take an 86% stake in the bankrupt Guangdong Development Bank after a
year-long battle with rival consortium led by France's Société
Générale. Citigroup will have 20%, the largest stake that that single
foreign entity is allowed to have in a Chinese bank.

Interestingly, IBM, the US computer giant, is also a member of the
consortium and will own 4.7% of the Chinese bank. IBM clearly hopes
that the connection will lead to lucrative services deals with the bank
as it modernises its technology infrastructure and business practices.

Nevertheless, It is extremely unusual for IT companies to buy stakes
in potential customers on the hope that it will generate new business.
IBM has just signed a three-year deal
with Germany's HypoVereinsbank covering application development, but
Big Blue does not own a stake in the German bank, as far as we know.

I suspect that IBM puts its investment in Guangdong Development Bank
in a broader context, as a demonstration of its faith in China's new
economy. In similar vein, Big Blue recently moved its worldwide supply
procurement division from the US to China — see this EngagingChina story.

More on Guangdong Development Bank in this Financial Times article ($).

Western businesses considering investing in China's red-hot banking sector should first read this
New York Times article, which argues that China's big banks are still
burdened with more non-performing loans than they acknowledge. More on
the NPL problem in this EngagingChina story.

Elsewhere on the finance front:

  • The Qualified Domestic Institutional Investor (QDII) scheme, which
    lets Chinese investors buy financial assets overseas, is “performing
    below expectations”, according to an official interviewed by the South China Morning Post.
    One reason is the continuing appreciation of the yuan, which reduces
    returns for local investors when foreign profits are repatriated. In
    addition, the high-flying local A-share market offers Chinese investors
    stellar returns without the currency risk. Chinese banks and fund
    managers have been given license to invest $12.6bn in foreign
    securities under the QDII program. More on QDII in this earlier story.

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