Monday, October 6, 2008
Caution and lack of experience limited the extent of Asian's clount in this crisis - WSJ
The crisis pummeling Western financial firms has given Asia a bigger role in global finance than ever before. But Asian institutions' caution and relative lack of international experience are limiting the extent of their newfound clout. With a string of deals since last year, banks and wealth funds from Japan, China and Singapore have become major investors in Citigroup Inc., Merrill Lynch & Co., Morgan Stanley, UBS AG and Barclays PLC, among others. And there is room for Asia's influence to grow further, thanks to its enormous cash stockpiles and relative financial health. China's four biggest listed banks, for example, held a total of $148 billion in cash and cash equivalents at the end of June. Western banks, meanwhile, are desperate for capital. Even with the passage Friday of Washington's $700 billion bailout package, Western lenders are likely to be shedding assets for a while to shore up their finances. That will limit their ability to expand, leaving more opportunities for Asia. "The Japanese and Chinese banks are going to be better placed to do things, because they have capital," says Rob Morrison, chairman of CLSA Asia-Pacific Markets, a Hong Kong-based brokerage part-owned by France's Crédit Agricole SA. "You have a global capital shift," he says, and Asia is "where the power lies." Altogether, big Asian investors have spent about $78 billion buying stakes in non-Asian financial institutions since the beginning of last year, according to research firm Dealogic. For 2006, the figure was just $6.6 billion. Still, Asian investors are wary of going too far. Sovereign-wealth funds such as China Investment Corp. and Singapore's Temasek Holdings Pte. Ltd. have largely stayed on the sidelines in recent months, after big investments last year -- some of which performed poorly. The funds' influence in deals they have done is constrained because sovereign-wealth funds aren't interested in running the foreign companies they invest in -- and would face political resistance if they were. Lack of experience managing big teams of Western bankers has also caused Asian investors to largely avoid acquiring control of Western institutions, even with their share prices plunging. Minority stakes could help Asian companies build strategic alliances and yield payoffs when a recovery comes, but could also limit Asia's collective influence over the finance industry. Japan's companies, long wary of foreign adventure, have been especially active lately, but they have also largely avoided takeovers. Mitsubishi UFJ Financial Group Inc., Japan's biggest bank by market value, agreed last week to buy 21% of Morgan Stanley for $9 billion, followed by a 9.9% purchase of Aberdeen Asset Management PLC of the U.K. for $200 million. Nomura Holdings Inc., Japan's largest brokerage, acquired the Asian operations and some of the European and Middle East operations of Lehman Brothers Holdings Inc. for about $225 million. And analysts say Japan's insurance giants could be among those interested in the assets put up for sale by American International Group Inc. Japan's re-emergence is being driven by factors at home as well as by the opportunities created by the U.S. financial crisis. Japan's aging -- and diminishing -- population is clouding prospects for growth, so Japanese companies, which have returned to health over the past decade, are seeking bigger growth opportunities overseas. Banks, with deposits from Japan's retirees ballooning just as the traditional domestic lending business is stagnating, want to put their money to work. And Japanese savers, looking for an alternative to superlow yields at home, are increasingly investing in foreign stocks and bonds. Already, investment-income profits sent home from Japanese-owned companies overseas, and dividends and income from foreign financial assets held by Japanese investors, have doubled in the past five years, surpassing the nation's trade surplus, Japan's traditional source of wealth. In 2007, Japan's income surplus was $154 billion, compared with its trade surplus of $117 billion. "Having accumulated a current-account surplus for decades, Japan has lots of assets," says Motoshige Ito, economics professor at the University of Tokyo. "Now we may be witnessing unleashing of these funds in search of higher returns." Asia's influence goes beyond its investments in Western firms. Its central banks are huge players in the market for U.S. and European government debt, which ultimately gives them some sway over interest rates in the West. Asia's banks are lending more abroad, and its companies are accounting for a growing share of global equity issuance. China's domestic capital markets, long closed to foreigners, gradually are becoming more accessible and more important. Beijing is considering allowing foreign companies to list here, and it has been building futures markets for copper and other raw materials that are increasingly influential in determining global commodities prices. Asia's current position represents a turnabout from its own recent setbacks, from Japan's bad-loan disaster to the Asian financial crisis of a decade ago. As recently as five years ago, China's big banks were considered technically insolvent, thanks to decades of state-directed lending. The government injected cash, then sold minority stakes in the banks to big Western institutions at relatively low valuations to spruce up the banks for initial public offerings. Chinese banks are now thriving. Industrial & Commercial Bank of China Ltd., or ICBC, the country's largest bank by assets, reported that net profit in the first half rose 57% to $9.4 billion. But Asia's experiences have helped instill caution. "We will continue to keep a tight grip on our pockets and spend every penny carefully," Jiang Jianqing, ICBC's chairman, said at the World Economic Forum in Tianjin late last month. "As a commercial bank, we don't favor bargain hunting." Many of Asia's existing investments abroad have fared poorly so far. Shares in Barclays have plunged by half since China Development Bank bought 3.1% of the British lender in August, and Morgan Stanley shares have fallen by more than 50% since China Investment Corp.'s investment in December. On Sunday, Ping An Insurance (Group) Co. said it would recognize an impairment of $2.3 billion on the 4.9% stake it bought in Fortis NV, which European governments are now trying to rescue. Chinese investors "really don't know when is a good time" to invest again in the West, says Fred Hu, chairman of greater China for Goldman Sachs. Now is a "tremendous window of opportunity" for aspiring Chinese institutions, he says, but "early investors clearly haven't done very well. It's really difficult for them to judge the right timing." For Japan, too, the current opportunities come with risks. Critics question how successfully Japanese companies will manage new acquisitions, especially in industries that rely on human capital such as finance. During Japan's boom era in the 1980s, Japanese banks made several high-profile investments in the U.S., only to sell them off several years later amid the bad-loan crisis in Japan. Japanese companies also could lose some or all of their recent investments if the situation in the U.S. financial industry deteriorates further. Most Japanese banks, while healthy, have yet to come up with convincing global expansion plans. "It's not clear whether they can attract capable bankers who are willing to work for Japanese banks," says Naoko Nemoto, a banking analyst for Standard & Poor's in Tokyo. She said the banks would have to motivate local staffs overseas and "offer them attractive pay packages and give them promotions."