Market Scan China Grabs A Slice Of Africa Parmy Olson, 10.25.07, 12:40 PM ET
LONDON - China's ambitions to get a foothold in resource-rich Africa took a significant step forward Thursday after the state-run Industrial and Commercial Bank of China Limited (ICBC), announced it was buying 20% of Africa's biggest bank, Standard Bank, for $5.5 billion.
The deal with the South African lender is the biggest-ever foreign direct investment into South Africa and ICBC's biggest-ever investment outside China. The deal, which has to be approved by South Africa's regulators and ICBC shareholders, will nearly double foreign ownership of Standard Bank to some 40%. It will also see the two companies set up a $1 billion private equity fund for making joint investments in emerging markets. ICBC is China's biggest bank.
The deal will help give the Chinese government, which has influence over some of the country's biggest companies, important influence and credibility when making investments in Africa. Standard Bank is in 17 countries in Africa, and has investments in many African firms. (A common strategy for investing in Africa is to buy into South African companies with exposure to rapidly-growing economies, like Nigeria, as it is less risky than investing in firms with more local exposure.)
The investment also makes it a lot easier for ICBC's corporate clients in China (there are a whopping 2.5 million of them) to get access to banking services for their businesses in Africa, of which there are many. Walking down streets in Lagos, Nigeria for instance, it is not unusual to see numerous shops run by Chinese entrepreneurs.
"Chinese corporations are extremely interested in Africa across every sector, and clearly many of those have an interest in Africa, where Standard Bank is very strong," Chief Executive of Standard Bank International Rob Leigh told Forbes.com. "We've been talking to ICBC for some time around business cooperation. That's how this deal was born."
ICBC Chairman Jiang Jianqing said many of the bank's "large clients" sought African investments, and the demand for cross-border financial services is accelerating.
Rapidly-industrializing China has increasingly relied on Africa for commodities like copper, zinc, gold and iron, which are abundant. About 13% of Africa's exports now go to China, and trade from Africa to China is growing by 50% every year. It's partly why the state-run China Development Bank last July bought a chunk of Barclays, a British bank that, thanks to its longstanding colonial roots, has a strong foothold in African trade finance. CDB said then that the investment would help "facilitate international commerce for Chinese companies." In May China created a $5 billion investment fund for Africa. (See: "Say It With Investment")
Similarly to the Barclays investment, the Standard Bank investment will see China tap into long-established expertise. "By making the acquisition, ICBC gets to learn from one of the best banks in Africa," said Robert Levitt, chief investment officer of Levitt Capital Management, which has shares in Standard Bank. "It will learn about financing the mining industry. It will learn about African FX. It is a very good move."
"Probably the best financial systems of any emerging market are in South Africa," said Jan Randolph, head of sovereign risk at Global Insight. "Their banks are as good as ours, and their capital markets are as developed as anywhere else in the West, or Japan."
The Chinese government, with more than $1 trillion in foreign currency reserves, has managed to build an impressive sovereign wealth fund it is now using to make investments in companies like Barclays and Standard Bank, in order to fulfill China's short term and long term economic needs. Africa is a particularly attractive market and not just because it churns out 30% of the world's gold, half the world's diamonds, and half of the world's platinum, but also because its economy is growing rapidly.
Sub-Saharan African countries grew by 6% in 2006 for the third year in a row, largely due to rising commodity prices. Remove India and China, and the sub-Sahara has grown faster than most of Asia.
China also likes Africa because it's relatively uncomplicated. "They're interested in investing in other emerging markets because there are far fewer political issues," said Richard Ferguson, director of global emerging markets research at Nomura. "They don't have to deal with things like the U.S. Congress or the European Commission, and all the problems that go with that.”
With its myriad investments in other African companies, Standard Bank can also act as a source of credibility and influence for future business that China may do in Africa. "Every empire does this–make overseas investment to safeguard its own strategic interests. In terms of lending and in terms of the projects in which it can invest, it does bring influence,” said Ferguson.
The two banks have already worked out an impressive system for cooperation. For a start, Industrial and Commercial Bank of China will have the right to nominate two non-executive members of the Standard Bank Group board of directors, with one of the non-executive directors being nominated as the Vice Chairman of Standard Bank Group. There will also be an ICBC/Standard Bank Group Strategic Cooperation Committee.
Perhaps most intriguing of all is the so-called "global resource fund," which Standard Bank and ICBC are planning to set up as part of their new tie-up. Essentially it is a private equity fund, with a joint management team, into which both banks will provide seed money before inviting further investment. The banks aim to create a $1 billion fund focused on emerging markets.
"We've been talking about specific areas of cooperation with ICBC, and we believe there is a very compelling story of bringing Standard Bank's expertise and access to investment opportunities throughout emerging markets, together with ICBC's ability to bring their Chinese client base and Chinese investment interest in these opportunities," said Leigh. (See: "African Stock Safari")
In one way, ICBC could act as the vanguard for other Chinese companies and banks to move into Africa and make similar investments. “There are four big banks in China and what they do can be can be dictated by the minister of state responsible for them. These things tend to happen almost like a confluence of thinking,” said Ferguson.
For instance, someone from China could well go for MTN Group, the hugely successful African cell phone company. The state-run China Mobile is one potential suitor, and though MTN has a market cap of $30 billion, it's not exactly out of China's budget range. Cell phone use in Africa is growing faster than anywhere else in the world, according to a 2005 study by the Centre for Economic Policy Research.
In terms of locales, Nomura's Ferguson cites Chinese government sources as saying they have South Africa (which accounts for a quarter of Africa's GDP), Nigeria, Cameroon, Zambia, Congo-Brazzavill and Angola, in their sights, mostly due to their rich natural resources. MTN has a presence in five of those markets. Standard Bank can now act as a gateway to these countries, and much more.
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