In an environment when most M&A activity is greeted with a giant yawn, it is notable that Bank of America’s announcement of a $3 billion investment in the China Construction Bank turned a few heads.
It’s very possible this kind of investment, in this case the acquisition of a 9% stake, will become the fashion du jour for the big banks, and a fashion not likely to fade away any time soon. With 1.5 billion people, a fifth of the world’s population, China is no longer a sea of humanity, hard to feed and harder to employ.
Instead, with newly minted millionaires and an exploding middle class, China has become a consumer market that any major American marketer can ill afford to ignore. To see our biggest banks increasingly focus attention there should be no more surprising than for Wal-Mart or Dell to pay attention to China.
Certainly investment bankers are paying attention. And when these guys are driving the bus, watch for CEOs to go shopping. It’s no coincidence that every one of the nation’s largest investment banks has at least one senior level, Chinese-born banker, earning $5 million to $10 million a year, scouring China in search of deals.
Okay, you say, fine for Bank of America or Citigroup to be interested in China, but what’s that have to do with the rest of us? Fact is, what’s happening in China is already affecting communities across this country, and it’s affecting community banks.
At about the same time that BofA was wrapping up its Chinese investment, China’s huge, state-owned Chinese National Offshore Oil Company, known as Cnooc, surprised the markets with its $18.5 billion bid to buy American-as-apple pie Unocal. And while you were reading about that bid in your morning paper, people in Newton, Iowa were awakening to the news that Haier, a Chinese appliance maker, had made an offer to take over the town’s largest employer, Maytag. Haier, not exactly a household name in the U.S., liked the link with the Maytag repairman and those venerable Maytag brandsu00e2u20ac”Hoover vacuum cleaners, Jenn-Air, and Amana appliances, among others.
So far, the Chinese have been willing to hold our debt at low rates of interest, all the while keeping their own currency undervalued. Meanwhile, we’ve been able to consume, consume, consume, buying all those Chinese products for a fraction of what we could produce them for.
Here’s how Tom Friedman put it in his New York Times column: “You know that cheap mortgage you just got? Well, who do you think subsidized it? In many ways it was China.”
What Friedman doesn’t say is that just as consumers have been feasting on the low interest rate environment, banks have benefited mightily from a mortgage market that, it would be fair to say, has been a bit hotter than it might have been without a little help from our friends from China. When that help endsu00e2u20ac”and China is increasingly under pressure to revalue its currency upwardu00e2u20ac”the reverberations in our own economy will be felt not just in the money centers, but in the smallest towns as well. China’s focus on the footwear and textile industriesu00e2u20ac”not just throwing armies of cheap labor at handwork, but well-funded private companies investing billions of yuan in high tech, state-of-the-art equipmentu00e2u20ac”has slammed the Italian economy by crippling its two largest traditional exports. In his book, China Inc.,Ted Fishman chronicles a similar focus now taking place in more sophisticated industries, and suggests that when China can put together a 757, say, at one-third the cost and all the quality of a Boeing, some very big companies could have some very big problems.
Will all of this impact your bank this year? Probably not. But there’s barely a community in America today without a factory or a distribution center that might fall under Chinese ownership overnight. There’s not a manufacturer in America whose product can’t be replicated, at a fraction of the cost, by a Chinese factory. There’s not a university in the country without Chinese students who once longed to continue their careers in the U.S., but who now head home to be part of what they see as a more exciting future.
In such an environment, it’s not a bad idea for even community bankers and directors to think about the huge globalchanges in business that are just beginning to impact their customers and will, inevitably, impact the future of their bank. Pay attention to these trends today; they can be turned into opportunities. Wait too long, and, well, that’s why you’re a director, making sure the board doesn’t let trends become problems.