China Ramps Up Financial Market Regulation

Posted on February 27, 2009 at 4:02 PM

The China Banking Regulatory Commission has recently announced that it would strengthen regulation on overseas M&A in an attempt to ensure the health of its five largest lenders (which include Industrial & Commercial Bank of China, Bank of China, China Construction Bank, Bank of Communications, and Agricultural Bank of China).

Investors have expressed concern that the Chinese government stimulus might actually stimulate more default loans.

Thus, the CBRC would “examine the quality of new loans and boost its monitoring of the quality of existing loans, while calling on them to prepare for the possible exit of foreign strategic investors as share lock-up periods expire,” Reuters  reports.

These five large lenders are healthy enough to ride out the worldwide financial crisis, according to CBRC chairman, Liu Mingkang. However, that has not stopped investors from worrying about the upcoming months.

The Royal Bank of Scotland announced on Thursday, February 26 the biggest British corporate loss in history -$34.4 billion.  RBS, like UBS, had sold its stake in the Bank of China in order to recover its investment. Bank of America also sold some of its stake last month in China Construction Bank.  China Construction Bank is unsurprisingly worried.  CCB Chairman Guo Shuqing said earlier in February that the CCB is uncertain about overseas’ bank asset quality, and has no plans to do acquire banks abroad.

The CRBC also said that “Major Chinese banks should keep a close eye on strategic investors' moves, seriously study future arrangements with them and be ready to take action in a rational manner,” according to the same Reuters article. Apparently, Goldman Sachs, Allianz Group, and American Express hold “strategic stakes” in the Industrial & Commercial Bank of China, and all three will be released from a lock-up period sometime during 2009.

While it looks like there might not be much cross-border investments and acquisitions right now, tighter regulations do mean that attorneys get much more work sent their way to help financial institutions navigate the legal system.  And even more importantly, tighter Chinese regulations show that the government is actively trying to stabilize its market, making China a more attractive market for FDI in the future.

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