Industrial and Commercial Bank of China (ICBC) invested internationally with the intention of sourcing capital to expand its operations in china. The bank targeted the international markets as they readily have adequate capital. In addition, ICBC wanted an opportunity to increase its wealth, manage bank risks, and increase its loan productivity.
ICBC is China’s biggest bank, with 6.45 trillion in assets. Due to high demand of money, the ICBC issued equity to both domestic and the global markets. The aim of the Initial Public Offer (IPO) was to upgrade its domestic operations and extend its lead in corporate lending and the potentially huge credit card market in China (Akerlof, 1970)
Due to the excellent performance of the Chinese economy, the investors felt a strong need to invest in ICBC’s IPO; as they expected to make huge profits. By then, China’s economy was growing by 10 % a year. Many corporate investors were attracted by the banks IPO, including Goldman Sachs Group, American Express and Germany’s Allianz just to mention but a few.
Diversification was a critical consideration that inspired ICBC in its decision to go international. Essentially, the bank wanted to spread risk by investing in other companies, individual investors and firms outside China (Akerlof, 1970).).
Hedging the banks currency against risky exposures was a very essential benefit that ICDC expected through issuing of equities in the international markets. As such, the currency exchange value was a significant factor in making such a global investment. ICBC wanted to generate monetary gain from those economies that had lower money value in comparison with China, therefore selling more equities with the same amount of capital (Abbey, 2007)
One of the key factors that attracted international investors to China’s ICBC was the fact that China had been voted as one of the best attractive investment destinations in the world .The American Chamber of Commerce had continually reported that American firms’ that operated in China were more profitable than its counterparts in the United States, hence drawing attention to foreign investors.
Indeed, ICBC had consistently rewarded investors with higher stock prices and dividends hence sending the attractive signals to foreign investors. In addition, ICBC investors were promised higher interest rates in their fixed deposits. ICBC’s returns on equities were associated with multiple indicators including interest rates, exchange rates, stock prices, commodity prices and minimum returns. Similarly, ICBC offered attractive customized products for its home and foreign investors (Abbey, 2007)
One of ICDC’s recent reviews revealed that the banks experienced critical default risks on more than a quarter of more than 8 Billion Yuans lent to local governments and other investors across the country. This puts the investors at a risk in the event that the bank is liquidated.
Apparently, ICBC scrutinized its loans at some point, spreading the risk among other investors. Lack of transparency could also be an issue to investors as it can lead to loss of money especially through corruption (Lee, 2003). The process of Chinese capital market modernization can create complications. For instance, foreign strategic investors’ participation in China has dropped drastically because of barriers stemming from bank reforms and recapitalizations in recent times.
Another challenge that the ICBC faced was the complex relationship between China’s balance of trade and the value of its currency. In conclusion, global market is a large market that helps investors raise capital from foreign markets. Such a move helps the banks across the world to increase wealth, manage bank risks, and increase loan productivity (Abbey, 2007)
References
Abbey, N. H. (2007) The Methodology of Positive Economics, Essays in Positive Economics. London: University of Chicago Press.
Akerlof, G. A. (1970). The Market for International Banks: Quality Uncertainty and the Market Mechanism. Quarterly Journal of Economics, 84(3), 488–500.
Lee, A. (2003). Do We Really Need Central Bank Independence? A Critical Re- examination. London: University of Connecticut.