FinanceAsia Country Achievement Awards - China

Best Domestic Commercial Bank: China Merchants Bank

Sorting the wheat from the chaff in ChinaÆs domestic banking sector requires a sharp eye û thereÆs not much wheat around. But the number of financial institutions has steadily risen as the authorities try to modernize the banks with one hand while propping them up with the other.

The problematic state of the traditional banks made it hard to pick a æwinnerÆ from their ranks û or at least a winner that would be around for a reasonable period after winning the award. This unfortunately ruled out many of the smaller banks, prime candidates for takeovers, such as Minsheng, ChinaÆs first private bank and several other interesting candidates such as the Shenzhen Development and the Shanghai Pudong Development Banks.

Hence the choice this year of China Merchants Bank (CMB). CMB is the largest regional bank by assets with over $20 billion in 1999, up from $17 billion in 1998. It is one of a number of second generation ænew modelÆ Chinese niche banks which followed in the wake of 1995Æs Central Bank Law and Commercial Bank Law. This was an attempt, so far only partially successful, to make the big four policy banks into more commercial and independent entities.

CMB specializes in trade finance and is in a good position to benefit from increased trade following ChinaÆs accession to the World Trade Organization. Although CMB is not yet listed, it has issued shares to the government, state-owned enterprises and institutional investors. It has a healthy parent in Hong Kong-listed China Merchants Group.

In a tribute to the Asian financial crisis, the financial health of the banks is critical when choosing favourites. In this respect, CMB shines, with non-performing loans (NPLs) at just over 12% putting it well ahead of the four state banks. It also scores higher than other leading niche banks such as Everbright, which took a beating when it was forced to absorb loss-making China Investment Bank; and Citic Industrial, which has lent aggressively to high growth areas such as telecoms and infrastructure. And its capital adequacy jumped to over 16% after its paid-capital jumped to Rmb4.2 billion ($508 million) in 1999 from Rmb4.2 billion in 1998. Its return on average equity, according to Fitch IBCA, is also excellent by Chinese standards: it scored 9.64% in 1999 and 19.18% in 1998.

Lending margins should also jump in the future, following the PeopleÆs Bank of ChinaÆs decision to cease constant interest rate cuts after its seventh in July 1999.

Perhaps one of the most impressive things about this bank is its modernity. Its IT is so sophisticated that a CEO of a leading Western commercial bank commented that CMBÆs technical resources were on a par with his own bankÆs. This is perhaps an overstatement, but its IT platforms founded in 1987 are cutting edge by Chinese standards. It means the bank can provide such useful services to its customers as ATMs and credit cards.

Best Foreign Commercial Bank: Standard Chartered

If there is one commercial bank that is setting the pace in the cut-throat world of banking in China itÆs Standard Chartered. What makes this bank stand out from the crowd is its strength across the board. Although other banks may have the top spot in separate areas Stan Chart scores highly in all sectors û cash management, trade finance and corporate lending.

The bankÆs credentials in these areas are backed up by numerous first-class testimonials from its blue-chip clients. Standard CharteredÆs commitment to China found favour, especially in the wake of foreign banks pulling in their horns after the GITIC debacle in 1998. ôWhen many banks substantially scaled down their applications or even shut down, Standard Chartered set up its Beijing branch increasing its financial support to our firm,ö says one grateful CFO of a Chinese firm.

One of the pillars of Standard CharteredÆs business is that it is one of the few banks with the coveted renminbi licence. The Chinese bureaucracy rules the foreign banks with a steely hand. To protect the local banks' monopoly on lending and deposit taking, foreign banks are granted licences not just on a city-by-city basis but on a branch-by-branch basis. To qualify, branches have to have $150 million in foreign exchange assets and two years of consecutive profits. Only then can they start to deal in renminbi. These licences are like gold dust, and Stan Chart has two branches that can operate in renminbi.

This is all the more important as multinationals are increasingly turning to renminbi funding to match assets and liabilities and to benefit from low interest rates. To cope with this trend, the bank is swelling its renminbi coffers. It has set up the biggest interbank funding facilities of any bank in China. Up to Rmb7 billion û almost a billion US dollars û is available from the central bank, the PeopleÆs Bank of China, for its renminbi funding. These funds are available to the bank on the interbank loan market.

Being able to provide renminbi loans to its corporate clients is an important part of Standard CharteredÆs success in China. ôWe are delighted with the renminbi loan facility arranged by Standard Chartered, which has considerably decreased our borrowing costs for our subsidiary in China,ö says a leading foreign multinational in China.

But Standard Chartered is also busy helping out Chinese firms in trade finance. The firm is above all a thoroughbred emerging markets bank. This emerging market risk expertise, braced by its presence in Africa and the Middle East, means that Standard Chartered can offer many unique services to both Western and local companies. One such is a bill discounting service to Chinese exporters who do not have the expertise to weigh up the credit risk from foreign importers.

The company is not a laggard in cash management, either. The Electronic Banking System for Windows enables CFOs to check all their balances from their laptops and facilitates the remittance of renminbi and foreign currency. Stan Chart does not just facilitate remittances, however. It is also the first foreign bank to have joined the electronic clearing system of the central bank. This enables monies to be collected directly from the central bank within a day instead of going via the commercial banks, who can sit on the money for up to a week, earning interest on the delay.

Standard Chartered is clearly in China for the long haul. With the largest number of branches and representative offices and almost 150 years of experience in this difficult market, it has earned the biggest compliment any firm can receive: it has become part of the landscape.

Best Domestic Investment Bank: CICC

It is perhaps not surprising that the China International Capital Corporation should win the award for best domestic investment bank. A fusion of Chinese local experience and Western expertise provided by Morgan StanleyÆs 37% stake, CICC has been very active in the local market since its formation in October 1994. The fifth anniversary of the companyÆs existence marks the fulfilment of its founding objective: to serve as the leading investment bank driving the reform of ChinaÆs state owned enterprises.

The first step on this journey was the $4.2 billion China Telecom IPO in October 1997, in which it acted as global coordinator, joint bookrunner and joint lead underwriter. China TelecomÆs primary markets success was followed by an equally successful secondary offering in November 1999, which totalled $2 billion. Again CICC acted as joint lead underwriter and joint bookrunner of the public offering. Last but not least, CICC acted as financial adviser to China TelecomÆs $6.4 billion acquisition of mobile telephone assets in three additional provinces.

The new year began with the successful completion of the highly important Petrochina IPO which raised $3.89 billion in market conditions rather unfavourable to æold economyÆ shares. Petrochina's IPO marked the completion of the restructuring of China's entire oil and gas industry aimed at positioning the company as a competitive player in the domestic and international energy markets. In this transaction CICC again acted as joint global coordinator, joint bookrunner and joint lead manager. At the same time, CICC, as joint lead-manager, successfully brought one of China's leading internet companies, Sina.com, to Nasdaq, raising $68 million in its extremely well-received IPO.

Shortly after the completion of Petrochina and Sina.com in April, CICC acted as joint global coordinator, joint bookrunner and joint lead manager for China Unicom, the country's second major player in the telecommunications industry. Unicom's IPO came to market in June, raising $4.9 billion [prior to the greenshoe]. Unicom was warmly received by investors, allowing it to raise its price range and complete the offering at HK$15.58 per share, near the adjusted high end of the range.

CICC has a number of major offerings pending, including the IPOs of Sinopec, the nation's second major energy company, and BaoSteel, China's largest steel maker. These and other transactions now in the formative stage should continue to establish CICC as the major underwriter of China and China-related equity offerings in the international markets.

Domestically, CICC led a number of important A-share offerings including the Rmb874 million IPO of the China World Trade Centre and the secondary offering of Rmb1.24 billion for Konka Group. These two transactions were significant in that they marked the first time Chinese A-share offerings had been priced using international methodologies rather than traditional administrative guidelines.

In particular, the Konka offering was significant since it marked the first time a Chinese A-share offering made use of the book-building process and a roadshow for China's nascent institutional investors. This was entirely unbroken ground as CICC adopted international practices to the Chinese market by first building an institutional book, establishing a price range via an institutional roadshow and in the final stage offering shares to retail investors based on this price range allowing them to bid within a range rather than for a fixed price for the first time. The resulting order book enabled the transaction to be priced at a tight 5% discount to the secondary market trading price as opposed to the typical 30% to 40% discount based on the traditional administratively set fixed price offering.

During the course of the year CICC acted as lead manager in the placement of shares for four companies totalling Rmb2.6 billion making it one of the top A-share underwriters in the domestic market. Looking forward CICC will continue to evolve as an important participant in China's domestic capital markets.

Best Foreign Investment Bank: Morgan Stanley Dean Witter

Morgan Stanley has had an outstanding 12 months in China. Three of the highest quality IPOs out of China were handled by the bank: China UnicomÆs $5 billion IPO, the $407 million block trade in China Telecom, the popular internet portals Sina.com and AsiaInfo. Other important IPOs are still pending: the next big oil company IPO, Sinopec; and the internet company GW.com. We all know that figures never lie, and according to Bloomberg equities league table, Morgan Stanley cruises into the number one spot for China with $2.5 billion worth of deals and an 18% market share.

The China Unicom deal saw $15 billion of institutional demand and was four times oversubscribed. Shares were priced at 19.8% premium to the midpoint of the initial price range and near the top of the revised price range of HK$13.8 to HK$16.

With AsiaInfoÆs $138 million IPO, Morgan Stanley lead managed the first ever internet infrastructure IPO from Greater China and the first internet infrastructure IPO completed in 2000. This deal saw the highest subscription level ever achieved for an Asian internet IPO, with a demand of $255 million translating into an oversubscription rate of more than 50. The price at the end of the first day rocketed to over $99, almost a 315% premium to its offer price, representing the best offer-to-first day close performance ever for an Asian Nasdaq-listed internet IPO.

With Sina.comÆs $138 million IPO, Morgan Stanley succeeded in pricing the deal near the high end of the filing range, and the price closed up 22% on its first day of trading.

There is little doubt that the skilful handling of these deals contributed to the boost of investor confidence in ChinaÆs markets. There is also no doubt that Morgan StanleyÆs franchise has been expanded by its association with China International Capital Corporation (CICC), providing it with insights into a range of sectors and personalities within China. It is no coincidence that from July last year to June this year, CICC and Morgan Stanley have dominated the China issuance market. CICC comes in fourth position overall, with an 11% market share, worth $11.5 billion dollars.

In particular, the China Unicom IPO, the largest in Chinese history, demonstrated the value of Morgan StanleyÆs global distribution network, its knowledge of the investor base and the research franchise.
Morgan Stanley also scored strongly in the bond sector, with deals mandated by the Ministry of Finance and the State Development Bank. Over the last 12 months it has had a market share of 27%. Landmark deals were the structuring and execution of $403 million unit bond for APP China. The transaction met strong investor demand with 50% oversubscription and was placed with 100 investors globally. The high-quality placement ensured strong aftermarket performance.

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