Foreign media fall short in explaining ICBC move

Industrial and Commercial Bank of China(ICBC) made the headlines of the world media, by announcing that it has bought 20 percent of Standard Bank of South Africa for $5.6 billion in cash - the biggest foreign acquisition by a Chinese commercial bank yet.

Actually it is not really eyebrow-raising, since Chinese government has consistenly encouraged banks to expand business abroad, however, most foreign media has failed to give a clear picture of the driving factors behind the move by ICBC. They mostly talked about that China is making Africa its very strategic source of oil, raw material for its booming economy, hence the move by ICBC could better serve those Chinese companies doing business in Africa. Besides, Beijing-based ICBC is flush with cash to pay for foreign expansion after raising a record-setting $US21.9 billion ($A24.3 billion) in an initial public stock offering in Hong Kong in October, 2006.

But all the analysis failed to touch the real bottom of the issue. It would be very illuminating to understand the background for the ICBC move. Currently Chinese banking regulator has tried to reduce the currency liquidity and repeatedly raised the banking deposit rate to force banks to cut down on loaning, but on the other hand the regulator has to give outlets for the great amount of capital possessed by banks. Therefore it will be a great solution to encourage the banks to invest abroad.

Besides, the stocks of Chinese banks have been so popular with investors that they have been overpriced. This could be evidenced by the great IPO performances of such state-owned banks as ICBC and Construction Bank. According to the Tobin's Q theory, this would be a great opportunity for banks to invest abroad.

However, the media's mission is to be the first to report, not to write academic articles, so it is not surprising that they stop short of giving the full picture.