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Newbridge notwithstanding, passive stakes can be a growth activity
Several formal announcements and rumors over the last year indicate that foreign investors-both industry players and financial and private equity investors-are taking an increasingly serious look at the acquisition of minority equity stakes in small and medium-sized commercial banking institutions in China. The serious dispute developing as this article goes to press between Newbridge Capital, Inc. (Newbridge) and certain government shareholders of Shenzhen Development Bank (SDB) regarding Newbridge's proposed acquisition of such government shareholders' shares in SDB will only intensify interest in these deals.
These transactions began in 1996 and accelerated in 2001 (see p.20). Market rumors and sometimes opaque announcements continue to circulate regarding other potential minority equity investments by foreign institutions in the likes of the Bank of Communications, Huaxia Bank, China Merchants Bank, and China Minsheng Bank-in fact, almost any commercial bank other than the big four wholly state-owned banks: Agricultural Bank of China, Bank of China, China Construction Bank, and Industrial and Commercial Bank of China. Foreign investors that have already participated include multilateral institutions like the Asian Development Bank (ADB) and the International Finance Corp. (IFC), financial institutions like Citigroup Inc. and The HSBC Group, and US private equity institutions such as Newbridge, although it is now extremely unlikely that Newbridge's deal will go through. Rumored new entrants include United Overseas Bank of Singapore, Hong Kong-based Bank of East Asia, and private equity powerhouse The Carlyle Group.
The regulatory environment
No PRC legislation specifically authorizes any of these transactions. Several PRC laws and regulations exist concerning foreign investment in Chinese commercial banks, and rules govern foreign purchases of equity in Chinese companies in private transactions (see p.21). But no law or regulation yet provides a specific legal basis for foreign or foreign-invested entities to purchase stock in Chinese commercial banks organized as companies limited by shares (CLSs) in private transactions, and such investments were prohibited by a 1994 People's Bank of China (PBOC) notice. Contrast this with foreign investments in Chinese insurance CLSs, which are undertaken in accordance with the China Insurance Regulatory Commission's (CIRC) 2000 Provisional Regulations on Investment Through Shares in Insurance Companies and 2001 Notice Concerning Standardization of Certain Items in the Absorption of Foreign Investment...