Wednesday, December 10, 2008

Bank of China May Delay Rothschild Deal as Approval Delayed


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By Luo Jun and Cathy Chan

Dec. 11 (Bloomberg) -- Bank of China Ltd. may have to delay a planned $342 million investment in La Compagnie Financiere Edmond De Rothschild as China’s banking regulator withholds approval, three people familiar with the matter said.

With a Dec. 31 deadline approaching, the watchdog has yet to endorse the bank’s application, the people said, declining to be identified as talks are private. China’s third-largest bank may extend the deadline and seek to complete the purchase in next year’s first quarter, one person said.

The impasse highlights a tougher stance by the Chinese government after investments in foreign financial firms including Morgan Stanley and Barclays Plc led to about $13 billion in paper losses over the past year. China’s six largest banks hold $670 billion of cash between them, more than the combined market value of the world’s seven biggest non-Chinese lenders.

“The thing stopping China is the fear that they’re still catching a falling knife,” said Paul Cavey, chief China economist at Macquarie Securities Ltd. in Hong Kong.

Wang Zhaowen, a Beijing-based spokesman at Bank of China, said the lender is waiting for approval for the investment application it made in September. He declined to comment further. A spokesman at La Compagnie Financiere Edmond de Rothschild in Paris declined to comment when reached by phone.

The latest overseas bank acquisition green-lighted was in September, when the regulator approved China Merchants Bank Co.’s purchase of Hong Kong’s Wing Lung Bank Ltd. The go-ahead came after China Merchants extended a deal deadline twice.

Change in Attitude

China’s government is becoming more cautious after a number of investments overseas soured as the global credit crisis deepened, with financial firms around the world taking $982 billion in losses and writedowns since July 2007.

China Investment Corp., the nation’s $200 billion sovereign wealth fund, paid $5 billion last year for 9.9 percent of Morgan Stanley and invested $3 billion in Blackstone, the world’s largest private-equity firm. Both New York-based companies have lost more than two-thirds of their market value since the investments were made.

“It’s never been a good idea for Chinese financial firms to pounce on counterparts in the U.S. and Europe under the illusion that we’re the smarter ones,” said Li Jing, a Shenzhen-based analyst at Ping An Securities Co. “Two decades ago, Japanese banks did the same and their failure should serve as a lesson.”

China Development Bank, which funds the nation’s public works, spent 2.2 billion euros ($2.8 billion) for 3.1 percent of Barclays Plc in July 2007 and bought another 136 million pounds ($202 million) of stock in June. The combined holding, which was diluted to 2.97 percent after Barclays’ latest round of fundraising in November, is now worth $582 million.

Afraid to Invest

The losses have caused some Chinese institutions to pull back. “I don’t dare to invest in financial institutions now,” Lou Jiwei, chairman of CIC, said Dec. 3. “What if they go bust? I will lose everything.”

State blocking of deals helped Ping An Insurance Co. and China Development Bank avoid billions of dollars of potential losses in the past year, according to data compiled by Bloomberg.

Chinese officials in January vetoed a planned $2 billion investment in Citigroup Inc. by China Development Bank, the Wall Street Journal reported at the time. An investment of that size would have lost about $1.4 billion since Feb. 1, based on Citigroup’s share price.

Ping An, the nation’s second-largest insurer, on Oct. 2 scrapped a planned 2.15 billion-euro purchase of half of Fortis AG’s asset management unit after the industry regulator withheld approval for the deal. Ping An had already lost more than 90 percent of an initial 1.81 billion euro investment made in November 2007.

Venture Planned

Compagnie Financiere Edmond de Rothschild, the French fund- management unit of privately-held bank LCF Rothschild Group, and Bank of China will begin an asset-management and private-banking venture to sell Rothschild’s financial products through the 10,800 branches of the Chinese lender, according to a Sept. 18 statement announcing the investment.

Michel Cicurel, the chairman of the French firm, at the time said Compagnie Financiere Edmond de Rothschild “had no need for cash” as it struck the deal. The company managed 29.6 billion euros in assets at the end of 2007.

To contact the reporter of this story: Luo Jun in Shanghai atjluo6@bloomberg.netCathy Chan in Hong Kong at kchan14@bloomberg.net

Last Updated: December 10, 2008 17:53 EST

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