In a well-done post on his blog at the Council on Foreign Relations website, Brad Setser takes a contrarian view on why local Chinese banks have been happy to take foreign investment, and why the government has been happy to let them. And it wasn't about what everyone thought it was.
One more subtle sign the world has changed. Anderlini and Tucker report in today’s FT that China wasn’t all that interested in getting access to Western financial technology after all. China’s government let foreign banks take stakes in China’s state banks more to increase their IPO valuations than out of a desire to have the state banks emulate the US and European bank practices.
This is compelling for several reasons, one of which is my belief that China's first global brands will not be consumer goods companies or tech firms, but companies from the service sector. Banks may well be one of these.
But mergers and acquisitions do not teach or confer best practices upon either the acquirer or the acquired. Nor, despite all-too-regular protestations to the contrary, do they provide either party with exclusive access to some operational mojo unavailable elsewhere.
Resistance to change in any large financial institution is perhaps exceeded only by that in large marketing agency groups, and China's banks are no exception. For this reason, partial foreign ownership will not inspire Chinese banks to alter their practices. Chinese banks will be motivated to improve their practices only when the growing demands of their customers make doing so a matter of survival, and/or when the government makes clear that a failure to do so will result in China's central bank, the People's Bank of China, taking some executive scalps.
When that happens, they will glean those best practices deemed appropriate to their enterprises and specific needs from any of a host of sources, from consultants and software vendors to the aggressive imitation of exemplary competitors at home or abroad. They may also manage to develop some of their own homemade, culturally appropriate best practices in the meantime.
Regardless of how they do it, the banks (and all Chinese enterprises) can acquire best practices without resorting to the expense and trouble of a corporate shopping spree. Any protests to the contrary are rationalizations of an acquisition pursued for other reasons.