"It’s not going to be a doomsday scenario¹ for the domestic banks when December 2006 comes," says May Yan, senior banking² analyst³ at Moody’s Investor⁴ Service in Hong Kong. "The December event will only have an impact over the next five to 10 years."
　　HSBC Holdings PLC of the United Kingdom has the largest foreign bank network in China, with 12 branches. In contrast, Industrial & Commercial Bank of China, China’s largest domestic bank, has more than 20,000 outposts.
　　"We have a two-pronged strategy: Grow our business organically and through cooperation with our strategic partners," said Richard Yorke, chief executive of HSBC China. HSBC has invested more than $5 billion in China, the most among foreign banks, but more than $4 billion of that has gone into equity⁵ investment in local financial institutions —— including a 19.9% stake in China’s fifth-largest bank, Bank of Communications.
　　China’s banking regulator has capped the maximum amount of foreign investment in a single domestic bank at 25% and a maximum stake for a single investor at 20%. But in September, the China Banking Regulatory Commission said it was reviewing the caps on foreign bank ownership and intends to raise them gradually before the end of 2006. Analysts⁶ expect the caps to remain under 50%.
　　To attract strategic investors⁷ while helping⁸ domestic banks become more competitive, China recapitalized three of the biggest state-owned commercial banks by injecting $60 billion. The fresh capital and sale of nonperforming loans were enough to attract giants Bank of America Corp., Royal Bank of Scotland PLC and Goldman Sachs Group Inc. to take stakes in the three recapitalized domestic giants ahead of their initial public offerings.
　　Chinese government officials describe the introduction of foreign strategic investors as "win-win" —— foreign banks get to share in the China growth story while domestic banks become more competitive by adopting international risk-management strategies, developing key business segments and attracting profit-motivated shareholders⁹.
　　But buying into China’s biggest banks also has limitations and risks. When taking a 9% stake in China Construction Bank Corp. in June, Bank of America agreed not to open new retail¹⁰ operations in China and to close existing retail operations there. Strategic investors in CCB and Bank of China have also been required to lock up their shares for three years, making it difficult for investors to get out if new problems are discovered at domestic lenders.
　　Blockbuster deals such as Bank of America’s CCB deal and Singapore state investment firm Temasek Holdings Pte. Ltd.’s 5% stake in the same bank —— representing a combined $5.4 billion investment —— also carry political risks. Domestic critics noted¹¹ those two investors paid less than 1.2 times book value, then watched the bank’s IPO fetch 1.95 times book value just months later.

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