The recent $5.5bn acquisition by China’s largest bank, Industrial and Commercial Bank of China (ICBC), of 20% of South Africa’s Standard Bank Group is a landmark strategic investment for Africa and represents a possible sea change in global banking as Chinese banks begin the move to prominence on the world stage.

At the end of 2006, according to the China Banking Regulatory Commission (CBRC), China’s five largest commercial banks collectively had operations in 29 countries, comprising 31 subsidiaries, 47 branches and 12 representative offices, mostly through Bank of China, which has been China’s traditional bank overseas for decades.

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Following on from buying 90% of Bank Halim Indonesia in December last year, ICBC bought 80% of Macau’s Seng Heng Bank in August for $584m and in late October it made China’s largest foreign acquisition to date with the $5.5bn Standard deal. ICBC chairman Jiang Jianqing says: “We are targeting markets with strong economic and trade relations with China and, for example, we are applying for an operating institution in Russia.”

 

Watershed deal

The Standard deal is a watershed for China’s banks and both a clear and cautious sign of things to come. Described as a “major strategic partnership”, the $5.5bn deal is of huge significance to both banks as well as both countries and Africa as a whole.

Standard chief executive Jacko Maree says: “It is the biggest foreign investment by any Chinese company ever and it is the largest foreign direct investment into South Africa since the end of apartheid. Its significance goes way beyond the actual deal between the banks.”

The deal is much bigger than Barclays’ purchase of 54% of South Africa’s second largest bank, Absa, in 2005 and gives Standard huge structural benefits. Standard, with 950 branches, operates in 18 African countries, including South Africa, and in 20 countries outside Africa. Having grown its headline earnings per share and dividends per share by, on average, 20% a year for the past 20 years, it now has an expanded platform for growth. The deal will give it access to the world’s fastest-growing economy and strengthen its capital base and its ability to finance trade flows between Africa and Asia. The complementary aspects of both banks’ networks offer exciting opportunities.

China had invested $11.7bn in Africa up to the end of 2006 and is desperate for natural resources; more than 30% of China’s oil imports, for example, come from 13 of Africa’s 17 oil-producing countries and there are 300,000 Chinese people working at present on projects in Angola. Standard’s formidable network across 18 African countries gives ICBC hugely attractive opportunities for synergies and for benefiting Chinese investments. And Standard’s expertise in resources financing and commodities across the globe is also expected to benefit state-controlled ICBC and resource-hungry China.

The ‘strategic partnership’ also involves the creation of a $1bn mining and resources fund, which would invest in resources in emerging markets and help finance China’s commodity needs. Each bank is expected to put in $250m, with the rest coming from third parties.

The Standard deal provides a massive win-win situation for all concerned, including Africa. The underlying importance of a transformational deal such as ICBC-Standard cannot be underestimated and Chinese banks will be looking for more of the same.