China has begun buying banks in CEE as part of its plans to deepen ties with the region. Three banking acquisitions are already closed and at least two more are pending approval by regulators.
The Industrial and Commercial Bank of China (ICBC) kicked the process off in May last year, closing a TRY669mn (€167mn) deal to acquire 75.5% of small lender Tekstilbank from Turkish conglomerate GSD Holding. The bank operates now with the name of ICBC Turkey and its share price has soared since the time of the deal. ICBC Turkey has only a 0.32% share in the Turkish banking industry by assets and it’s the 24th largest bank among a total of 47.
At the same time the state-owned Bank of China got a banking licence to operate in Turkey. The headquarters will be in Istanbul. The lender will have capital of $300mn. It has a 0.37% share in the Turkish banking industry by equity.
Now the pace is starting to quicken with two new bank deals in June. On June 8 China's Bohai Commodity Exchange (BOCE) and Ukrainian State Property Fund (SPF) signed an agreement on the sale and purchase of 99.9% of the Ukrainian small-sized Bank for Reconstruction and Development (UBRD), the SPF said.
The UBRD was founded in 2004 with the main aim of providing credit support for small and medium-sized businesses. In November 2016, the SPF said the bank was sold at the starting price of UAH82.8mn (€2.8mn).
BOCE CEO Yan Dongsheng offered on June 8 to sign a memorandum of cooperation with the SPF in order to "work fruitfully to help Ukraine conduct effective privatisation and disseminate information about Ukrainian privatisation prospects among its customers".
In the same week China’s Citic Bank and the investment arm of state-run China Tobacco on June 9 agreed to buy a 60% stake in Kazakhstan’s Altyn Bank, which is in turn owned by the second largest Kazakh lender Halyk Bank. No transaction value was disclosed.
The acquisition marks another development in China’s growing investment story in Kazakhstan and Central Asia, with the region set to help roll out China’s One Belt One Road initiative aimed at expanding infrastructure and trade links between China and the West.
The deal was confirmed during Chinese leader Xi Jinping's visits to Kazakhstan for a Shanghai Cooperation Organisation (SCO) summit. The SCO is a political, economic and military bloc founded in 2001 by China, Russia, Kazakhstan, Uzbekistan, Kyrgyzstan and Tajikistan. The transaction is set for completion by the end of 2017. Halyk Bank said it will retain a 40% stake in Altyn Bank.
China has also been extending its financial muscle in Russia as it starts to get down into the dirt of day-to-day business in the region. China has set up a ruble-yuan currency exchange and the amount of trade that is paid for using the national currencies of the two partners has gone from nothing in 2000 to a quarter of all deals by the start of 2017. Russia’s banking sector is far larger and more developed than nearly any other country in the region, so the emphasis here has been more on cooperation and services than M&A. Both of Russia’s biggest banks, Sberbank and VTB Bank, have also opened branches in Beijing several years ago. China is also partnering with Russia’s domestic Mir payment system that is supposed to rival VISA and MasterCard.
"About 100 Russian commercial banks are now opening corresponding accounts for settlements in yuan. The list of commercial banks where ordinary depositors can open an account in yuan is also growing," according to Lin Zhi, head of the Europe and Central Asia Department of the Chinese Ministry of Economic Development. And in November 2018 Russia’s Sberbank became the first Russian bank to begin financing letters of credit in Chinese yuan.
China clearly intends to put similar financial options in place elsewhere. At the start of this year the Bank of China Serbia a.d. Beograd, the Serbian subsidiary of Chinese state-owned lender Bank of China, became operational, Serbia’s government announced. The bank, with headquarters in Belgrade, will be the central office for Central and Eastern Europe. China has already invested €5.5bn into Serbia, according to Serbia’s Minister of Construction, Transport and Infrastructure Zorana Mihajlovic.
Serbia has been working to improve its bilateral relations with China, aiming to become the main destination for Chinese investors in SEE and CEE. Granting the operating license to the Bank of China is a step that puts Serbia one step closer to this aim. Serbia’s Prime Minister Aleksandar Vucic said on January 22 that the next step should be the direct Belgrade-Beijing air link, which will also be the first in the region.
More bank deals are on the way. CEFC China Energy Company (CEFC) has announced plans to set up a bank in Georgia with $1bn of capital to facilitate Chinese investment into the tiny Caucasus republic, which will serve as a de facto headquarters for the region. CEFC has also agreed to buy a 50% stake in J&T Finance Group, which operates banks in Slovakia and the Czech Republic. The deal is awaiting EU regulatory approval.
And China is casting its net much wider than the traditional former Soviet bloc space that most western investors look at. As bne IntelliNews has reported, China's UnionPay is slowly setting up in Iran.
This is part of a series looking at the implications of China's growing interest in Central and Eastern Europe and Eurasia.