Scots Beat Yanks in China Bank Deal

With visions of an ATM in every neighborhood in China , foreign banks and investment firms are in line to close "China Club. "

moneybags communism

The initiation fee for the " China Club " is straightforward and pure moneybags communism : invest cold hard cash in its largely insolvent state banks , put your reputation on the line , reassure nervous foreign investors about the upcoming IPOs , and share your risk management , corporate banking and other expertise with enthusiastic Chinese executives . The benefits of membership in the China Club are alluring but mostly maybes . Maybe you'll get by taking over an IPO or working in China with the bank in asset management , corporate banking or credit cards . Part of your money back

But the temptation was too much to resist and they stand in line for membership . Bank of America, the German bank Allianz , Goldman Sachs , Merrill Lynch , UBS and the Royal Bank of Scotland ( RBS ) have already agreed to or to take equity stakes in China's big four state banks in the current negotiations . There is another twist to the story . Membership fees are not the same for everyone, but are negotiated one by one and this can be a sweet or sour taste depending on the deal is to cut leave.

Pay more for uncertainty

The recent deal inked led by the Royal Bank of Scotland consortium is the best so far and saves the well known Bank of America deal hands down.

Bank of America acquired a 9 % stake in China Construction Bank for $ 3 billion . The Royal Bank of Scotland ( RBS ) invested $ 1.6 billion for a 5 % stake and brought Merrill Lynch and Hong Kong tycoon Li Ka - shing along to the risks which dividing the total investment to $ 3.1 billion for a combined 10 % of the shares . The RBS Group also paid less than the Bank of America , stated that paid 1.2 times book value . Even better than putting up less cash and getting slightly better value , the Scots were able to get a lifeline from their Chinese partners . Although details have not been released , the RBS group gets a portion of their money back if black holes in the books, if the IPO planned for early next year is canceled or if the banks simply disagree .

Thank you. May I Have Another

The question is, membership fees will decline over time or get steeper ? Goldman Sachs and Allianz are in talks to pay about $ 1 billion for a stake in China's largest state-owned bank - the Industrial and Commercial Bank of China . China favored UBS is also discussing an investment of $ 500 million in the Bank of China for its lead underwriting role in the years to IPO cement .

This rush of foreign banks to get a piece of the Chinese action shareholders should take a break. Like when you join the local country club , there are unforeseen risks and costs . Soon the monthly membership fee be increased and then there are the dreaded " special assessments " for new greens , a swimming pool or a new irrigation system.

Risk , Return - Maybe?

China's large state-owned banks have a huge burden of non - performing loans to those poorly performing state-owned enterprises in recent years . With a small minority participation , foreign banks have very limited control over the management of their partner bank . As the old saying goes banking, if you owe the bank a little money , the bank owns you , if you owe the bank a lot of money , you can feel the bank. For investment banks , the payout seem even slimmer . Investment banking and underwriting fees are notoriously slim in Asia and IPO after market valuation will need to enjoy a substantial risk - adjusted return .

And do not even think of missing a payment . Last year, Citigroup was chosen to endorse a $ 5000000000 list for China Construction Bank after offering an equity stake buy . It was later dropped like a hot potato after failing to follow through.

I hope all these banks make a lot of money in China - but it may not be wise to exchange it for perhaps billions of hard earned capital .

Carl Delfeld is head of global consulting firm Chartwell Partners and editor of Chartwell Advisor and the Asia Investor Intelligence newsletters . He served on the Board of Directors of the Asian Development Bank and is the author of The New Global Investor ( iUniverse : 2005) . For more information go to