1. Introduction
1.3 Objective
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understand the individual factors and the motivations behind the strategy. In addition, the paper will explore the financial and operational synergies and the impact on the local banking sector after the bank’s ownership stakes was acquired by the foreign financial institutions.
The paper will further explore the risk and rewards on the foreign financial institutions that acquired ownership stakes in Chinese banks. The paper will discuss the risk factors of the asset valuation and changes using static analysis in order to comply the Basel accord and the rules governing the risk weighted assets. In order to achieved maximum shareholder value after acquiring the ownership stakes in the Chinese banks, the conclusion will arrived by offering the ideal acquisition target under optimal portfolio risk.
Finally the paper will further explore Taiwanese bank’s approach in entering the Chinese market by considering the bank’s own financial and both internal and external variables. By using the motivation and strength of the strategy in taking ownership stakes in the Chinese banks, it can act as a reference for entering the Chinese market. In addition, the paper will explore the options of establishing representative office, branch, subsidiary and taking ownerships stakes in Chinese banks, by considering the cost and time value variables to suggest the ideal timing of entry.
1.3 Objective
Most major commercial banks in China gradually transform from local to cross-region operation, with being listing on the stock market as the optimal goal.
Further, some banks look for the opportunity to cooperate by bringing in foreign financial institutions to participate in acquiring equity stakes to increase international visibility and opportunities overseas as business agents enhance the risk-control and capital adequacy to meet local statutory requirements. There were 25 foreign financial institutions, as the results, taking equity stakes of 34 Chinese banks during 2001 to 2011, and explained Chinese market is the main merges and acquisition (M&A) target market for foreign financial institutions in the last decade. Furthermore, current regulations to become listed on the stock market permit total foreign ownership of a Chinese bank up to 25 percent and no more than 20 percent held by a single entity.
As such, cooperation mainly focuses on debt consolidation, cross-region operations, and compliance with all rules. Meanwhile, local banks can dominate in bank operating as well as exercise their rights in board meetings.
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From the foreign financial institution’s perspective, it is viable to adopt the subsidiary’s approach when entering the Chinese market. However, detail research into the potential profitability must be taken into careful consideration. As the barrier to set up such subsidiary and the following branch network expansion are relatively higher compare to other entry option. Normally it will take the foreign financial institution 3 to 4 years to breakeven when taking the subsidiary approach.
Moreover the rationales behind the decision in taking ownership stakes in the Chinese banks are: building brand awareness, intra regional expansion, mixed operation, internationalization strategy, enhancing market competitiveness, raising risk management capabilities and enriching human resources.
However, the Taiwanese bank’s China current operation was only limited in serving the Taiwanese customers. Since both Taiwan and China shares the same languages and cultural background, Taiwanese banks should expand beyond their current operation scope by tap into the lucrative local market. As to whether the Taiwanese banks should take the approach of taking ownership stakes in the Chinese banks, the decision must be based on individual bank’s strategy and their market share target. As Taiwanese bank’s asset size are relatively smaller compared to the Chinese state owned and joint-equity commercial banks, plus it will not be viable in the short term for the state owned banks in Taiwan to take ownerships stakes in the Chinese banks. Therefore whether the privately owned Taiwanese banks has the capabilities to take ownerships stakes in the Chinese banks remains to be seen.
This paper will discuss the strategic participation in China banking sector by foreign financial institutions, and analyze the affected variables of equity stakes acquisition and its relative intensity. Meanwhile, the optimal acquiring equity stake proportion and portfolio risk for foreign financial institutions will be analyzed further under the regulatory capital control and objective of maximizing equity value. In the last, we will discuss the best timing and entry model of Taiwanese bank in China financial market.
Therefore, we first have empirical study in Chapter 3 about the equity stakes acquisition of foreign financial institutions in China banking sector with history data, and then adopt Cox proportional survival model with consideration of relative variables such as macroeconomic of home country of foreign financial institutions, interaction between foreign financial institutions home country and China and both of financial ratios for foreign financial institutions and invested Chinese banks. Besides figuring out the significance level respectively, we also discuss the optimal probability hazard threshold to be as determination to take strategy of equity stakes acquisition or
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not for foreign financial institutions, including Taiwanese banks, in the near future.
Furthermore, it shall be necessary to comply with regulatory capital control for those foreign banking institutions under the Basel Accord. With this point of view, to analyze the optimal investment return with constraint to reasonable possession of risk is cardinal importance. In Chapter 4, we will assume the dynamics of the asset value of foreign financial institution and invested Chinese bank individually, and the dynamics of the exchange rate, and evaluate the optimal acquiring equity stakes proportion to achieve the goal of maximizing shareholder value under the limitation and bridle of risk exposure and appetite and have static analysis further.
We will stretch the research to the Taiwanese banking sector finally in Chapter 5.
Except for the accordance to the model set up in Chapter 3 to estimating the respective intensity of equity stakes acquisition for Taiwanese banks in different types and located districts of Chinese banks, this paper also deliberates further in pan-government-owned banks and private banks separately. Moreover, as political and economic relationships of Taiwan and China getting in depth recently, China financial market is became main business scope for Taiwanese banks. When this market is pretty much laid out by foreign financial institutions as leading, we will adopt the real option approach to analyze the business strategy of the following financial institutions such as Taiwanese banks and discuss its optimal operating demand threshold. In addition, this paper will also involve the further discussion of current regulatory entry models respectively.
There are six chapters in this paper, including this introduction. In Chapter 2, the extant literatures about development of China banking sector, determinants of foreign financial institution expansions, merge and acquisition of financial institutions and strategy of entry in China by Taiwanese banks will be reviewed. The equity stakes acquisition of foreign financial institutions, the analysis of strategic investment under maximum equity value and timing and layout in China by Taiwanese banks are analyzed in Chapter 3, Chapter 4 and Chapter5 respectively, and offer conclusion and suggestion in Chapter 6.