TheMinsheng Bank Case
Thecredit issue starting in mid-2007 caused many adverse economiceffects to nearly all the financial institutions worldwide. However,there was one particular instance that showed some positive economicdifferences in the financial fall. The Minsheng Bank (the boomingcase) demonstrated an economic gain contrary to other financialinstitutions which invested in the US housing credit (Gao, Lu, andFung, 1). Throughout the tough period, Minsheng got its way topenetrate to US market as well as it paved the way for otherfinancial enterprises in China to exploit the international markets.
Thecredit issue of Minsheng Bank from mid- 2007 took a different angle.As other banks experienced massive losses, the Minsheng got theopportunity to penetrate the US market without much struggle. Thebank started planning how to venture into a foreign market andparticularly in the US (Gao, Lu, and Fung,1). During this period, itorganized a deal to acquire a stake of US$95.7 representing 4.9% ofUCBH Holdings based in the US which was initially accounted inOctober 2007 (Gao, Lu, and Fung,9). At the beginning of March 2008,the Regulatory commissions of banking in China allowed the MinshengBank to proceed with the arrangement. The purchase of the UCBHHoldings was prospected to bring about two hundred million US dollarsaccounting for 9.9% of the holdings. The acquisition was carried intotwo phases whereby in the first step, the price per share wasseventeen point nine US dollars and the period was closed atSeptember 2007 (Gao, Lu, and Fung,9).
Duringthe second stage, the bank increased the UCBH possession to 9.9%. Inthis period they combined the issuance of the initial shares and thepurchase of the secondary shares. Each stock was issued at a premiumthat did not exceed 5% for 90 days (Gao, Lu, and Fung,9). By June2009 Minsheng would increase its ownership of the UCBH to 20%. Thebank would pay the purchase for the two phrases using cash. Thispayment was equal to 5.8% of the book value of the bank as at June2007. However, this payment did not affect the bank cash flowsbecause it was obtained from a non-public share of 2.6 billiondollars (Gao, Lu, and Fung,9).
Onthe other hand, several financiers associated with the US residentialmortgages went through a terrible financial crisis. This crisisparticularly affected the US economy with 2.2% Gross Domestic Productfall at December 2007 and decreased further to 1% in the mid-2008(Yao, Luo, and Morgan, 10). In May 2008, the national reserve of theUS cut down the interest rate to 2% to relief borrowers andencouraged consumption. There was also the devaluation of the UScurrency. As a result, many foreign investors withdrew the large sumof funds from the market of the US which toughened the capitalfinancing (Yao, Luo, and Morgan, 11). In the meantime, the withdrawnmoney inflicted high pressure on the foreign currencies causingfluctuations in the global financial market.
Betweenthe mid-2007 and March 2008, several large investors in the WallStreet lost more than four hundred and thirty billion dollars ofaggregated market value of the top ten investment banks in the US(Yao, Luo, and Morgan, 7). Conversely, the mortgages’ lendersincurred approximately one hundred and sixty-two billion dollarslosses. The Citigroup emerged as one of the top losers with itslosses amounting to forty point seven billion US dollars. Some otherbanks that suffered high losses include Swiss, and Merrill Lynch wassuffering thirty-eight and thirty-one point seven billion dollarsrespectively (Yao, Luo, and Morgan, 8). The total of the mortgageslosses plus other failed credit and bad debts totaled more than onetrillion dollars.
Otherthan the US, the financial crisis also impacted negatively on Chinaeconomy. Some financial institutions in China had invested heavily inthe US credit and as result of the crisis their financial marketunderwent some turmoil. However, these financial institutions fromChina were reluctant to say that the US credit crunch brought themmassive losses (Yao, Luo, and Morgan, 13). It could be necessarilytrue because Chinese banks rarely experience mortgage defaults ascompared to their western partners because residence purchasers aremostly high income and town residents who are entailed to give largedown payments. However, some reports showed that some banks of Chinaexperienced losses between mid-2007 and 2009. For instance, the Bankof China only managed to get a net profit of 31% which is very lowcompared to other commercial banks whose profits exceeded 65% (Yao,Luo, and Morgan, 13). Also, the Bank of China incurred the loan andassociated losses of two point one billion dollars. These lossesdropped the bank’s US security investment by 5% swabbing out theanticipated group’s profit of about 18.7% (Yao, Luo, and Morgan,14). Residential mortgage loans declined the gain portfolio for manyfinancial institutions in China. This decrease was as result of largebalance and high defaults as well as increased deposit risksassociated with the loans.
Accordingto the approval rate of seventeen votes against one vote of theMinsheng’s investment in the US market, the investment is notdeemed too risky. This authorization rate considered that UCBHbalanced the customers’ coverage of Minsheng and presented it witha hopeful podium for the Chinese bank to extend it share market inthe US (Gao, Lu, and Fung, 10). This extension of the Chinese bank inthe US market could speed up its accessibility as an opening for itsdeliberate global development. The US sub-prime predicament offeredan excellent chance for Chinese enterprises to attract the wealthyworking class of the Wall Street to come to China. Therefore, theChinese administration should support Chinese companies to obtainimportant global-renown business more firmly. However, the governmentshould release some of the massive investments in the US market toavoid heavy losses if the crisis persists.
Onthe side of the opposition, the investment was deemed too riskybecause Minsheng was diverting from its strategic developmentobjectives by concentrating more on constructions and real estateloans than its strategic plans. As well, about 10% of the creditportfolio was based on the strained Californian bazaars (Gao, Lu, andFung, 10). These areas were associated significant migration and loandefaults. Also, there were major criticisms of the credit groupsrelated to the construction borrowing. Nevertheless, Minsheng’sinvestment was one of the first and unique investments that presentedthe China country to penetrate in the US market despite theunfavorable conditions that prevailed in the financial markets.
Gao,Gerald Yong, Jiangyong Lu, and Hung-Gay Fung. “Minsheng Bank:Penetrating the US Market Through Acquisition.”Poon kam kai series08/383C. (2008): 1–18. Print.
Yao,Shujie, Dan Luo, and Stephen Morgan. “Impact of the US CreditCrunch and Housing Market Crisis on China.” Journal of ContemporaryChina 19.64 (2012): 401–417. Web.