Dee Prince: China’s Banking Adventures in Africa

[Editor’s note: while this blog is ostensibly about Russian affairs, we also have a strong interest in global energy politics, and will be making an effort to occasionally branch out to discuss the impact of state-owned energy firms on the market both comparatively and in the context of Russia. Once again we are pleased to feature our distinguished guest blogger Dee Prince (pen name), an international petroleum consultant specialized in China and Africa. Also see Dr. Prince’s articles “A Renaissance for Nigeria” and “Sino-African Energy Relations“.] Before I get to the heart of this edition’s subject matter, I’d like to share a little anecdote with you. As my profile states, one of my slightly more thankless assignments here in Beijing is to conduct seminars for banking regulators. The objective? To re-inculcate (or perhaps, inculcate) into the minds of the supervisors of the soon-to-be the largest banking industry in the world, the rudiments of Bank Risk, Bank Capital, Loan Loss Management and Provisioning and the Basel Accords among other important regulatory issues.


Those who study the Chinese banking system well know that in the short history since western-style banking was hurriedly established in the nation, easily the most troubling feature of the system has been a cancerous growth in the proportion of bad credits in overall loan portfolio. This has been because of the lack of lending experience, and, sadly, often venal lending practices, not to mention heavy political interference in the running of the state-owned banks. The frightening extent of this problem has been intensively studied and analyzed by economic, banking and accounting experts worldwide. Intriguingly, perhaps as evidence of China’s sheer global financial muscle, and the fear of even the world’s top-branded accounting firms that they may be shut out of potentially the world’s lucrative market, there has been much equivocation about the exact magnitude of the problem on the part of western analysts. Be that as it may, even the Chinese authorities recognize that this is a problem that cannot merely be wished away. Troublingly, the cancer is nowhere near a stage of remission. The popular model of using state funds to clear accumulated bad loans off bank balance sheets with infusions of new capital appears destined to continue. This is despite the fact that detailed analysis clearly shows that this is an inefficient short-term approach which does not adequately address the true systemic nature of problem. In the meantime, the authorities continue to publish statistics that suggest that the problem is somewhat under control. The jury is out on this. The reason why I spent some time digressing about the Chinese banking system bad loans problem is this: I was teaching seminar participants about current and alternative tools for dealing with this problem just last month. The central topic was the stalled process of creating (and encouraging the creation of) special purpose Asset Management Companies (AMC’s) to buy off bank bad loans at steep discounts. In a delicious example of perverse coincidence, at that very same time, the Communist Party of China (CPC) was rounding up its 17th 5-yearly congress. And as if to drive home the point that free market approaches were not going to be allowed to hold sway, banking regulators were being informed of the CPC’s instructions as to the solutions to these and other Chinese banking industry problems. Enough said. Yes, this was a lengthy anecdote, and I apologize. I simply wanted to set a context for the discussion that follows. The last time I was on these pages, I asserted that the likelihood of China following Russia-based Renaissance Capital’s foray into sub-Saharan African banking was as close to nil as you can get. Then what happens next? This: China dreams of Africa.


Image from the Economist

And as if to reinforce the fact that your contributor does not know what he is talking about, we get this piece of news. A development which is given a British “so-what-about-the-deal-with-Barclays Bank” slant in this brief article. (Editor: China Development Bank recently acquired 3% of Barclays, in a move that most observers believe was an ill-disguised ploy to get a piece of the action of the Amro ABN bid battle.) Predictably, the ICBC-Standard Bank deal has created waves, not least in the investee country, South Africa. Even in Chinese circles, there were contrasting and sometimes pungent reactions. So, does this mean that China has suddenly decided to switch gears and aggressively follow the trail blazed by Renaissance (especially since this upstart company has publicly stated a desire to compete with China in Africa investment)? To use a quaint English rhyming slang: “Not on your nelly”! Let’s get this clear. The Republic of South Africa is NOT part of sub-Saharan Africa. It is not the Democratic Republic of the Congo. It is not Rwanda. And it is most certainly NOT Nigeria. Indeed, one of the unintended, bizarre, yet partially healthy legacies of the Apartheid era, is the healthiest economy on the continent of Africa, and by far the safest and most robust banking industry in that benighted continent. The ICBC deal should not be seen as a resounding vote of confidence in African banking. It is a shrewd tactic that allows China’s leading banking institution to establish a foothold in a country that would probably more appropriately be classified as a lower tier European economy than as a poverty-stricken African nation. This was certainly not a trail-blazing, high risk, Renaissance-type market entry deal. However, the ICBC deal has some potential spin-off benefits, and I suspect that ICBC’s management (or, more correctly, China’s all-powerful State Development and Reform Commission, which must have approved the deal) clearly would have factored into their decision making. Standard Bank has a powerful network of branches and correspondent banking affiliates on the African continent. In many African countries, Nigeria being one of them, it is a shareholder/manager of market leading banks. Somehow, I don’t think the ICBC move was merely to invest in a stable, relatively low return economy such as South Africa’s. This investment allows ICBC to be a nascent junior player in higher-risk African markets without the pioneering bravado of Renaissance. Which is the better strategy? Renaissance’s or ICBC’s? Time will tell. As for the CDB partnership with Nigeria’s market leader, UBA, we should remind ourselves that this is not an equity investment. It is a still nebulously defined arrangement in which CDB will be calling the shots as to the disposition and application of its investment funds. In any event, CDB is not a commercial banking institution, and this means a lot even in the state-dominated Chinese banking industry. It is one of the many craftily charted avenues through which China opens up and assures markets for Chinese construction and infrastructure-building companies worldwide. Not to mention the political leverage that it gives the Chinese. If I wake up tomorrow to hear that a Chinese bank has just acquired a large stake in a bank in Zimbabwe, Burundi or Benin, I’ll have to rethink my views about China and African banking. For now, mea culpa it ain’t. I leave you with this final rider. Don’t imagine that every African country is bending over backwards to do anything, and everything to attract Chinese finance and investment. The comments of Nigeria’s respected Minister of Finance in a recent innuendo-laden speech give pause for thought.