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Bank acquisition a small purchase, but a big deal

By He Shan: 0 Comment(s)Print E-mail China.org.cn, March 2, 2012

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Lin Chunping was elected member of Wenzhou Municipal Committee of CPPCC for the first time on January 18, 2012. [File photo]

In the first direct acquisition of a U.S bank by a Chinese entity, Lin Chunping, a self-made entrepreneur from China's coastal city of Wenzhou, acquired a bank in the U.S. state of Delaware last year.

In terms of transaction volume, the deal was small compared with investments made by China's mammoth state-owned companies, but the deal was what industrial observers call a "breakthrough" in efforts by cash-rich Chinese to invest in foreign assets.

Lin paid US$ 60 million to takeover the failing bank, which exclusively operates in Delaware.

"The deal will prompt more Chinese to seek opportunities in the financial sector abroad," said Zhou Dewen, director of the Wenzhou Small and Medium-Sized Enterprises Development Association, in an interview with China.org.cn.

According to the 42-year-old businessman, the bank currently is engaged in providing financial services to Chinese living in the area, brings about US$500,000-600,000 to Lin in revenue.

"Playing by the rules" - a good lesson to learn

The U.S. financial and energy sectors have been long wary of foreign investment. While China National Offshore Oil Corporation (CNOOC)'s failure in its bid for U.S. oil retailer Unocal in 2005 is still seeded in memory, Lin's successful deal, despite its small size, teaches a good lesson that Chinese investors overseas can succeed if they play by the rules.

Adhering to US regulations, Lin said, was the secret behind his success in the deal.

"If you play by the rules and know the local laws, you stand a chance of succeeding," he said. "I hired professional lawyers and financial experts to facilitate the deal."

The team participating in the deal consisted of corporation representatives, lawyers, and financial experts. They played a vital part in the two-year-long negotiation.

"Delaware exercises sound laws to govern its corporations," he added. "You should confine yourself within the boundaries of laws and regulations, and also know how to use those rules to your advantage."

Investing for profits, not political motives

Although Lin's investment didn't cause a big uproar, there was suspicion around the deal, since Chinese investors are often suspected of making investments overseas to achieve strategic political goals.

In negotiating the deal, Lin had to repeatedly deny claims that he had government backing.

"None of the team members who participated in the deal have connection with the government," he said.

Having made his fortune selling garments and other goods made in China to Africa, the shrewd businessman planned to expand his business to a larger global playing field. He sensed an opportunity when he heard that a bankrupt bank in Delaware was awaiting buyers.

"I just thought it may be a good investment opportunity for me, so I just grasped it," he said.

The suspicion around Lin's takeover bid outlined the prejudices that Chinese investors endure when trying to participate in ventures in the developed world.

Huang Nubo, a Chinese property tycoon, was rejected by the Reykjavik government last year to buy a swathe of land in Iceland over concerns that the deal would help China gain a strategic foothold in the region.

Foreign assets attract SMEs

Wenzhou, home to a myriad of small- and medium-sized enterprises and wealthy entrepreneurs, is well known for its savvy investors.

Since China's economic opening and reforms in the 1970s, Wenzhou has relied heavily on family-run businesses driven by low-end manufacturing for export.

But over the past decade, businesses in Wenzhou have increasingly shifted away from manufacturing to more speculative activities such as real estate investment.

Small-and medium-sized enterprises are a vibrant part of the Chinese economy and also an enduring source of job creation, but they are barred from domestic investment opportunities in the realms of energy, telecommunications and finance.

With limited investment opportunities domestically, China's private enterprises are showing growing enthusiasm for foreign assets. However, most overseas investment is still led by state-owned enterprises. Private companies still face policy hurdles from spreading their wings in the global market.

Motivations behind Lin's deal

In the eyes of industrial analysts, the interesting part of Lin's deal is the motivation behind the transaction.

China's banking system is dominated by a handful of state-owned commercial banks which virtually bar private capital from entering the lucrative sectors, while the government allows foreign banks to set up branches or offices in China. Analysts think purchasing a foreign financial institution might be a way for Lin to bypass the investment limits set by Chinese finance regulators.

But Lin seemed to play down this speculation, saying that his primary objective is to gain a foothold in the US market.

In 1985, the Chinese government allowed a foreign bank to open a branch in Shenzhen for the first time. Restrictions have been gradually eased for foreign banks operating in China since China's entry into WTO in 2001. But these doors are still mainly shut for China's domestic private capital.

In what might be a straw in the wind, Chinese Premier Wen Jiabao pledged to "break monopolies" barring private capital participation in the financial sector in a speech at the central government's financial work conference in early January. Premier Wen promised to "ease entry" requirements to encourage private capital to participate in the sector.

"If there is a possibility of having a stake in a domestic bank, I will be very happy," Lin said. "But I haven't thought that far yet."