24 November, 2011

China Bank Mergers & Acquisitions (Bank of China)

Photo: Bank of China (Hong Kong)'s main branch in Central district, Hong Kong.

Bank of China Ltd. (中國銀, 中国银行)
China’s banking history clearly reflects the country’s turbulent history in the 20th century. In 1905, the sickly and backward Imperial China established the Da Qing Hubu Bank (which means the Great Ching [Dynasty] Finance Ministry Bank) in a largely failed attempt to better manage the country’s fiscal and monetary policies. At the time, modern commercial banking and trade financing in China was typically provided by foreign banks, with British, French, German, Russian, Japanese and American banks dominating the marketplace in major port cities.

On October 10, 1911, forces led by Dr. Sun Yat-Sen overthrew the Qing (Ching) dynasty, ending two thousand years of imperial rule and establishing the Republic of China. In 1912, the defunct Da Qing Bank was re-born as the Bank of China and given central bank functions. The new bank established its headquarters in Da Qing Bank’s former premises in Shanghai’s Bund district. The new entity was a dual state-owned commercial bank and a central bank.

However, the establishment of the new republic did not quell China’s political unrest. Quite the contrary, fighting between various fractions and warlords continued and worsened for the next four decades. Despite this political instability, Bank of China opened a Hong Kong branch in 1917, which eventually evolved into Bank of China (Hong Kong).

In 1928, Bank of China re-located its head office back to Beijing, and was granted the power to handle China’s foreign exchange transactions. To accomplish this new task, the bank opened a London office in 1929, marking the first time a Chinese bank had opened an office outside of Asia.

Meanwhile, from 1927 onward, the Kuomintang (Nationalist) forces and the home-grown Communist forces fought for the control of China, further sickening its national health and economy. The Chinese Civil War coincided with the rise of Japan’s imperial militarism, which aimed to dominate and colonize the entire Far East. Japan invaded China in July 1937, plunging the country into a lengthy and bloody war for the next eight years. The Japanese invasion, ironically, suspended the Civil War between the Kuomintang and the Communists as they joined forces to fight off the Japanese army. The Sino-Japanese War became part of the larger World War II in 1941, when Japan bombed Pearl Harbor in Hawaii and invaded other countries in the Far East.

Between 20 million and up to 35 million casualties in China were attributed to the Sino-Japanese War by the time Japan was defeated in 1945. Sadly, the Chinese Civil War resumed as soon as Japan was defeated. Over the next four years, the Communists gained more and more ground and drove the losing Kuomintang to the island of Taiwan in 1949. This important event split China into two: with the original Republic of China founded by Dr. Sun Yat-Sen in 1911 now controlling the island of Taiwan, and the Communists controlling the mainland and establishing the People’s Republic of China in October 1949.

Bank of China itself was also split. The fleeing Kuomintang brought with them the bank's liquid assets and bullion to Taiwan while the Communists seized the bank's mainland Chinese operations and branch network. The two sides confusingly retained the name Bank of China initially, due to both regimes’ claims of legitimacy and false hope that they would retake the other’s territory soon.

Subsequently in 1971, the Republic of China (Taiwan’s) Bank of China was privatized and renamed the International Commercial Bank of China, which became today’s Mega International Commercial Bank, which is still based in Taipei, Republic of China in Taiwan.

Meanwhile, Communist China’s Bank of China lost its central bank status to the newly-created People's Bank of China, but held on to its foreign exchange bank designation status. Throughout the 1950s, all foreign banks were gradually evicted from China as it rid itself of foreign powers.

Under Chairman Mao Zedong’s regime, Communist China then plunged into three decades of horrific social turmoil, famines and class struggles during which citizens spied on and terrorized each other as they accused each other as being Kuomintang supporters, capitalists, small business owners, intellects, political dissenters or whatever groups were out of favour at the time. The Chinese banking industry during this period was bureaucratic, backward and corrupt. It was only in 1979, three years after the death of Chairman Mao, that China finally adopted an “Open Door Policy” as it opened up to foreign trade, investments and tourism again.

However, true modernization of China’s banking industry only began in the mid-1990s, when regulatory and managerial reforms began to slowly transform Chinese banks towards more market-driven and risk-conscious enterprises. In 1994, Bank of China embarked on a major expansion plan to open more branches across the country.

In 2003, China's State Council approved the joint-stock restructuring of its state-owned commercial banks, of which Bank of China was one of the pilot banks in the process. One year later, Bank of China Ltd. was formally incorporated in Beijing. The Chinese government was said to have injected USD $22.5-billion in new capital to the bank in 2003 to raise its Tier 1 capital to international standards.

In what was then the world's largest IPO since 2000, Bank of China Ltd. raised HKD $87.0-billion (USD $11.2-billion) in May 2006 when it class "H" shares were listed on the Hong Kong stock exchange. As China was still inexperienced in managing its own stock exchange, securities underwriting and regulation, essentially all of China’s major state-owned enterprises were initially floated on the Hong Kong stock exchange before a mainland Chinese listing during the early 2000s. Then in July, 2006, Bank of China became the first lender to list its class "A" shares on the Shanghai stock exchange, raising another USD $2.5-billion.

Bank of China (Hong Kong)

Due to the close demographic, economic and trade relations between China and Hong Kong, Bank of China opened a branch in the then British colony in 1917. Eight other Chinese banks that would eventually become part of Bank of China had retail branches in Hong Kong, namely: the Kwangtung Provincial Bank, Sin Hua Bank, the China & South Sea Bank, Kincheng Banking Corporation, the China State Bank, the National Commercial Bank, the Yien Yieh Commercial Bank and the Bank of Communications. In addition, Chinese investors also established two Hong-Kong-registered banks locally: the Hua Chiao Commercial Bank and Po Sang Bank.

Following the Communists’ takeover of mainland China in 1949, the banking sector in China was nationalized and re-organized into a number of state-owned banks.  The Hong Kong operations of the aforementioned eight Chinese were take over by Bank of China's Hong Kong branch during the 1950s. Interestingly, these eight banks' Hong Kong operations continued under their own management and brands even though they were subsidiaries of Bank of China (Hong Kong), which was also known as BOCHK.

In the post-1949 era, Bank of China also acquired control of two more Hong Kong-based banks: Nanyang Commercial Bank and in 1970, the Chiyu Banking Corporation. For many years, BOCHK plus its 12 subsidiary banks were referred to as the 中銀十三行 (“BOC 13 Banks”) by the local press. The BOC 13 Banks each had its own administration and branch network. Needless to say, the arrangement created lots of redundancies and inefficiency, with sister banks often competing with each other for business. It was only in the 1980s that a common computer database system and platform was implemented across all 13 banks.

As China prepared for the 1997 turnover of Hong Kong from a British colony to an autonomous region of China, BOCHK aimed to play a much larger role in the local banking market. In October 2001, the Kwangtung Provincial Bank, Sin Hua Bank, the China & South Sea Bank, Kincheng Banking Corporation, the China State Bank, the National Commercial Bank, the Yien Yieh Commercial Bank, Po Sang Bank and Hua Chiao Commerical Bank were merged and consolidated into Bank of China (Hong Kong). Nanyang Commercial Bank and Chiyu Banking Corporation kept their own management and branding despite being subsidiaries of BOCHK.

Meanwhile, BOCHK returned the Hong Kong operations of Bank of Communications to China's Bank of Communications in 1998, which was originally founded in 1908, dismantled in 1958 and re-born in 1987 as China's first state-owned joint-stock commercial bank.  So technically the BOC 13 Banks in Hong Kong became the BOC 12 Banks in that year.

As another important step for Bank of China to take a much more important role in post-British-colonial Hong Kong, BOCHK was given the privilege to issue Hong Kong's banknotes in 1994, joining HSBC and Standard Chartered Bank.  BOCHK was floated on the Hong Kong Stock Exchange in October 2002. As of the end of 2015, Bank of China controlled 66% of BOCHK.

Recent transaction(s):
  • In 2008, Bank of China agreed to buy a 20% stake in French-based La Compagnie Financière Edmond de Rothschild for Eur 236-million (USD $340-million). The two planned to develop private-banking and asset management services for China's nouveau riche. The Rothschilds' private and merchant banking business dates back to the 1740s.
  • The above deal was scrapped in April 2009, after Bank of China failed to win regulatory approval from the Chinese government.
  • In December 2010, Bank of China raised CNY 59.7-billion (HKD $69.6-billion, USD $8.96-billion) from rights issues in Hong Kong and Shanghai to replenish capital following the lending boom in 2009.
  • In December 2015, Bank of China's 66%-owned Bank of China (Hong Kong) agreed to sells its Hong Kong-based Nanyang Commercial Bank (NCB) to China Cinda Asset Management Co. Ltd. for HKD $68-billion (USD $8.77-billion). Nanyang Commercial operated 42 branches in Hong Kong and 18 in China.

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