FINANCE: Citic Securities Weds Social Fund, CCB Eyes Indonesia

By newsdoug on June 11, 2015

Bottom line: Citic Securities’ new tie-up with China’s Social Security Fund should bring it major new business, while CCB’s Indonesian tie-up talks reflect its approach of moving slowly into emerging markets for its nascent global expansion.

Citic Securities ties with Social Security Fund

Two big finance stories are casting a spotlight on different trends in China’s rapidly transforming financial services sector as Beijing tries to create an industry that can compete with the big global players. The larger news is domestically focused, with leading stock brokerage Citic Securities (HKEx: 6030; Shanghai: 600030) in a major new tie-up with China’s Social Security Fund that will see the pair cooperate in a wide array of financial services areas. The other news is outward looking, and has China Construction Bank (HKEx: 939; Shanghai: 601939) in talks to form a relatively modest new tie-up with a local bank in Indonesia.

The first story shines a spotlight on the fact that China’s field of big institutional investors is woefully underpopulated. The limited number of major existing players like the National Council for Social Security Fund, China’s main public retirement fund, are also quite inexperienced at investing. As a result, many of these behemoths with billions of dollars to invest end up putting most of their money into very conservative products like sovereign bonds that have very low yields.

The second story highlights a nascent global expansion by China’s biggest state-run banks, which is part of Beijing’s plan to prepare these stodgy lenders to someday compete with better-run competitors both at home and abroad. So far that campaign has been led by domestic leaders ICBC (HKEx: 1398; Shanghai: 601398) and Bank of China (HKEx: 3988; Shanghai: 601988), but China Construction Bank has also shown recent signs of joining the movement.

Let’s start with the Citic Securities news, which is contained in an announcement that’s quite long and detailed about the equity part of its tie-up with the Social Security Fund but doesn’t include much detail about how the pair will work together. The tie-up will see Citic sell 640 million of its Hong Kong-listed shares to the Social Security Fund for HK$18 apiece, for a total of $11.5 billion ($1.5 billion). The sale price represents a large discount of more than 40 percent less than Citic Securites’ last trading price. (company announcement; Chinese article)

After the deal, the Social Security Fund will own 5.8 percent of Citic Securities. The 2 sides don’t say much about the nature of their tie-up, only that they will cooperate in a wide range of financial services. But the broader implication is that Citic Securities will help the fund diversify into a wider range of domestic and international investments that can help it boost its returns and improve its skills as a big institutional investor. The deal looks good for Citic Securities as well, which will get a huge volume of new business as it helps the Social Security fund to invest.

Next there’s the news on China Construction Bank, which is coming from its intended Indonesian partner, PT Bank Windu Kentjana. (English article) Initial reports cited the bank saying it was in talks to sell some or all of itself to the Chinese lender, but it later clarified that the initial relationship could look more like a strategic partnership.

Foreign banks are allowed to buy up to 40 percent of Indonesian lenders, and such a stake in Bank Windu would be worth $58 million at current market prices — an easily affordable sum for China Construction Bank. The reports also point out that CCB could also get an exemption from the 40 percent limit. CCB made a big purchase in Brazil in late 2013, buying 76 percent of local lender BicBanco for $720 million. (previous post) But it has been relatively quiet on the global stage compared with ICBC and Bank of China.

This latest move is still in negotiations, but does indicate that Construction Bank will take a relatively conservative approach initially that will see it target emerging market tie-ups with local banks. Such a strategy certainly looks prudent for an inexperienced lender like China Construction Bank, which has much to learn and is probably still at least a decade away from becoming a serious global player.