Here come the Chinese

There is little doubt that China has had its eye on Africa for some time now. And the latest development confirms that the Chinese Dragon is not just eyeing Africa's resource and commodity stockpile. China has its eyes on our banking assets too! China'

"We will become the top shareholder in the bank," said ICBC. "The two sides will develop their strategic cooperation in a broad area. The transaction represents the first of a number of thrusts into the international banking market. ICBC will soon open a branch in the US and also hopes to expand to Russia and the Middle East in coming months.

And it is the second massive capital transaction involving a South African bank after UK banking giant Barclays recently bought a majority stake in ABSA Bank. This means only FirstRand and Nedbank have yet to receive major international attention.

Biggest deal since democracy

ICBC will become the largest stakeholder in Standard Bank after paying USD 5.5 billion for 20% of the group. At current exchange rates, the R37.6 billion cash inflow will be the biggest of its type slightly eclipsing the R33 billion Barclays / ABSA deal. National Treasury welcomed the deal and commented that this confirms the desirability of South Africa as an investment destination.

But what inspired the Chinese bank to make this purchase? With a market capitalisation of nearly R160 billion at 25 October 2007, Standard Bank is a lot to swallow. What many South Africans dont realise is how far Standard reaches into Africa. The bank employs approximately 46, 000 people worldwide. It has 713 branches in South Africa and representation in 18 African countries, with 240 branches.

This African footprint is probably what prompted the Chinese investment. This, say analysts, makes Standard Bank the perfect partner for the ICBC. The Chinese bank will be better positioned to assist its many Chinese customers in doing business in Africa.

The quickest cautionary ever

At the same time as confirming the ICBC deal, Standard advised the cautionary sent out a mere two days earlier no longer applied. We guess this means the Chinese suitor concluded its due diligence and purchasing decision in a mere two days! Or did Standard Bank have information of the proposed deal before publishing the cautionary? We have seen cautionary notices relating to much smaller deals sit on the JSE SENS service for months before deals are concluded.

We also enjoyed the speculation which followed the bank's cautionary announcement. Analysts speculated that Standard Bank was about to make a huge acquisition in Africa. The Business Report believed a USD 600 million bid for one of the bigger African banks was on the cards. But others were more cautious. Sanlam Investment Management's Partice Rassou told the paper that the deal would probably be larger than an African transaction.

Ultimately the African link proved tetchy except to the extent the Chinese purchaser intends piggy-backing on Standards African infrastructure.

Deal boosts local currency

With the potential inflow of billions of rand, the local currency has strengthened significantly over the last week. The rand strengthened to R6.55 to the dollar at the time of posting this article. Analysts believe this large capital inflow will combine with high domestic interest rates to underpin the local currency suggesting we may even see the rand going as strong as R6.30 to the dollar.

A stronger rand is good news for domestic consumers, who should see the prices of imported goods coming down. On the other hand, exporters struggle as the prices they can achieve on international markets drop significantly. Those hoping for a reduction in inflationary pressures due to rand strength will probably be disappointed because, as is often the case various international dollar prices are soaring at the same time. Oil is a case in point, with the per barrel price of crude going above USD 90 for the first time.

We can expect fuel, a major driver in domestic prices to remain high in the near term maintaining pressure on domestic prices and meaning another rate hike is not off the cards.

Editor's thoughts:
The market has given the deal a giant 'thumbs-up' if Standard Bank's recent share price movement is anything to go by. The group's shares traded 4% higher on 25 October 2007, when the deal was announced. Do you think this strategic deal with China is a good move for a South African bank? Send your comments to gareth@fanews.co.za