Bank of China launched a wholly owned banking unit in London Tuesday, focusing attention on the global ambitions of China’s commercial banks. China Business News talks to Industrial and Commercial Bank of China (ICBC) chairman Yang Kaisheng about his bank’s global strategy

Faced with internal demand to internationalize and increasing domestic competition from foreign banks, Chinese commercial banks like the Industrial and Commercial Bank of China (ICBC) have begun taking on the challenges of globalization by competing for merger and acquisition (M&A) opportunities.

They are playing a dangerous game. While international banks like Citigroup, ABN-AMRO and HSBC have all become leaders through cross-border M&A, many other banks have capsized and drowned while attempting to expand offshore. With Chinese banks lagging behind these international peers in terms of infrastructure and human resource development, what are their chances of success where others have failed trying to expand internationally? How can Chinese banks take advantage of M&A to optimize their own operational models, profitability and shareholder interests? ICBC chairman Yang Kaisheng addressed these questions in an exclusive interview with China Business News.

China Business News: ICBC has been engaged in three overseas acquisitions in 2007. Does this mark a departure from ICBC’s previous globalization strategy of expanding by establishing new overseas branches?
Yang Kaisheng: In the past few years, ICBC has been constructive in pushing forward its cross-border operational strategy by accelerating the establishment of an overseas retail network and expanding its business scope. As of today, ICBC has 110 branches in 13 countries and established collaborative relationships with 1322 banks in 120 countries. This has created a primary financial service platform encompassing major international financial hubs and countries that have frequent economic and trade relations with China.

Our next step is to globalize with regards to our institutional structure and business. Our overseas assets and business revenues currently account for around 3% of our total. In the long run, we aim to increase the contribution from offshore to 10%. However, based on our past pace of development offshore, this objective will require a long time to be realized. Therefore, our previous overseas expansion strategy centered on expanding overseas branches no longer satisfies our need for internationalization.

ICBC will now use a globalization strategy centered on both the establishment of overseas branches and M&A.

CBN: What is your next overseas business development objective?
YKS: First, future overseas M&A activities have to be a good fit for our overall development plan and complement our domestic business. In terms of targets, we are focusing on neighboring countries, major financial hubs and new markets, especially emerging markets because they have higher growth and development potential. In 2006, economic growth was 3% across developed countries but 7% across all emerging markets. The banking sectors in these new markets are also opening up at high speed. Therefore, our current global M&A focus is more and more on emerging markets.

Second, we will continue to optimize and expand our overseas distribution networks. ICBC Moscow was formally opened on November 7, signifying our entrance into the Russian market. After acquiring Indonesia’s Haliam Bank, ICBC Indonesia was formally opened on November 12, signifying further extension of our service network into Southeast Asia.

In addition, ICBC is in the process of establishing branches in New York, Dubai, Doha and Sydney.

CBN: What are the greatest challenges to overcome for Chinese banks seeking to create a global business?
YKS: First, Chinese banks need to work on establishing efficient overseas management and institutional structures that can demonstrate local differences but global consistency in principles. Second, Chinese banks need to provide consistent services centered on a centralized IT system, a global technical platform and the sharing of resources between domestic and overseas institutions. In addition, risk management needs to be strengthened, particularly for our international operations. This means building the infrastructure for internal controls, evaluation and risk quantification to provide consistent management of credit risks, market risks and operational risks. Only in this way can Chinese banks enhance risk management at all levels.

CBN: You are the author of a comparative study on risk controls and crisis management. To what extent can internationalization help Chinese banks consolidate risk controls?
YKS: Internationalization is an important tool for reducing operational risks. The Chinese market will remain our main source of profit over the next few years but our international operations are an important strategic option for us to minimize operational and cyclical risks, especially when there are fluctuations in the domestic market.

CBN: Has ICBC developed the human resources necessary to drive globalization?
YKS: International competition is in part competition over human resources. On one hand, while ICBC needs to cultivate our exiting team so it can operate across countries and cultures, we need to accelerate recruitment on a global level for senior executives in key strategic positions. On the other hand, ICBC needs to accommodate the internal structural changes that have resulted from listing and new development by developing new human resource training programs to secure our expertise in this area over the long term.

At present, we have kicked off a comprehensive human resources training program assimilating international vocational training methods. At the same time, ICBC has established a market-oriented recruitment mechanism to attract top management and expert resources to boost our human resources team.

CBN: Chinese companies are being supported to go public by the central government. Can this create new business opportunities for Chinese banks?
YKS: More and more Chinese companies today purchase, sell and produce offshore and have overseas subsidiaries. This generates the need for global financial services from Chinese banks. Our efforts to accelerate our international development is to a certain extent designed to accommodate this change in the Chinese business scene.

This article appeared in Chinese in China Business News on November 21, 2007. The China Perspective takes no responsibility for the accuracy of the orginal article.