The Wealth Effect of Cross-Border Mergers and Acquisitions in the Chinese Financial Sector

China’s banking system is mainly run and operated by the People’s Bank of China (PBC). The People’s Bank of China Operates as the overarching authority through out China’s banking system (1). At the start of the early 1980’s china began to branch out the PBC’s power by creating four centralized banks. These four banks were known as the Industrial & Commercial Bank, China Construction Bank, Bank of China and Agricultural Bank of China (1). Over time China has continued to integrate more and more free market aspects into it’s economy. China has continued to allow many joint stock commercial banks and more then a hundred city banks to conduct business with in it’s country. International banks are also allowed to establish branches with in China and are also allowed invest in state owned banking institutions (2)..

Ping An, founded in 1988, is a private company that sits at the intersection of banking and insurance in China. It has taken advantage of China being the world’s fastest-growing insurance market and reductions of regulatory controls following China’s entry into the WTO in 2001. Ping An has built a highly profitable business and is exploring using the Bancassurance strategy, that is, selling its insurance products via banks in order to quickly and inexpensively develop market share without the need to develop agency relationships in the direct channel. While its largest shareholder is HSBC (16.13%), Ping An’s own foreign investments have been less than successful, with a failed $3.4 billion investment in large European bank Fortis in 2008. The global financial crisis was a major factor influencing this European failure, but the Chinese banking sector generally was largely insulated from the GFC due to its closed structure and no heavy investments in Europe. In 2009, Ping An acquired the Shenzhen Development Bank and is once again considering expanding the company abroad.

An Argument Against Citigroup in China Chinese regulations have historically limited the operations of foreign banks, but with the entry of China into the World Trade Organization (WTO), that is all slated to change- in theory. Geographic limitations for foreign banks are to be lifted by December 2006, along with a host of other restrictions that have retarded the growth of Western banks and the Chinese banking sector as a

The Chinese financial system has many differences from the ones of other economies as it is closely tied with national and regional governments who can dictate most of its activities (Yan, 2013). It is controlled by the large state owned banks which handle more than 70% of the savings and credits in the Chinese economy (Yan, 2013). The five largest banks that provide almost half of the total loans in the Chinese economy are majority owned by the central government while the government holds stakes at many of the other banks (Yan, 2013).

Currently, it is too early to speak of the recovery of American (and global) market of mergers and acquisitions (M&A). The volume of mergers and acquisitions fell by about 37% - to $ 1.75 trillion over the last year, and therefore fees of investment banks decreased (Zhang 2010). The deal between Kraft and Cadbury is the biggest one since March 2009, when Roche Holding completed the purchase of Genentech for U.S. $ 44 billion These transactions indicate the rehabilitation of selected major players and their optimistic assessment of their own investment prospects.

It has experienced fast growth since the open door policy in 1978, especially over the past decade. According to Turner, G & Tan, N & Sadeghian, D (2012, p.53), the total assets in the banking system (including assets in Chinese banks’ foreign branches and subsidiaries) was around 240% of GDP at the end of 2011, a substantial increase from about 200% in the early 2000s. The growth is mainly attributed to an increasing domestic demand for banking services and activities associated with economic development. As a result, China did not suffer severely from the 2008-2009 global financial crisis. The top five banks in China by size, the big four mentioned previously and the Bank of Communications (BCOM), control around half of Chinese banking system assets and deposits (Turner, G & Tan, N & Sadeghian, D 2012, p.53). The ‘Big Five’ also account for nearly 50% market share in the banking industry. These leading banks are mostly state-owned and partially privatised through listing on the Hong Kong stock exchange (Turner, G & Tan, N & Sadeghian, D 2012, p.53). Compared with the stock markets, the banking system in China has considerably greater importance due to its size (Allen, F, Qian, J & Qian, M 2005, p.70) and the structure of its economy. However, the stock markets in China are considered to be comparatively more efficient than the banking system within the country

Recently the globalization of financial sector, and banking markets involved many important issues regarding to corporate governance regulation for banking enterprises and this includes Changes in regulatory framework

In terms of the regional trends, North America’s control over M&A deals seems to continue into 2018. The expectation is largely based on the new administration adopting pro-business policy agenda and there are hopes the tax reforms might incentivise deal-making in the US. But the situation is still unclear and could mean a different outlook for M&A. Thomas Vaughn, co-leader of Dykema’s M&A practice said, “We are still hearing that uncertainty around the Trump administration’s priorities and regulations will have the greatest impact on M&A from a global perspective”.

As there was a global restructuring and reorientation in the banking industry, China made its own norms and banks had to comply with them. This is due to the hierarchy system which does not give banks a lot of independence to make decisions. Strategic partnerships were limited to 20% and foreign ownership to 25% leading to increased foreign investments especially for the SOCBs. The foreign investors were eager to spread their businesses in mainland China and were looking to tap into the growing credit card and asset management in China, however, the Chinese government imposed restrictions on their entry. (chaudhuri, 2009)

World Investment Report shows that cross-border M&A increased from 1990-2005. However, it began to decrease from 2008 regarding quantity and value due to the global economy crisis in 2008. However, according to world investment report of 2009 cross-border mergers and acquisitions has been increasing in some region by 2010, especially in Asian countries such as India.

In February this year, China’s top securities regulator Xiao Gang was dismissed and criticized for financial corruption because under his administration, a speculative stock bubble has inflated in the country’s stock market. Share prices more than doubled in one year. Despite of the abnormal inflation, since last June, there has been “a steep plunge in stocks” as well as “erosion in the value of China’s currency”. Xiao Gang conceded that recent troubles reflected that “imperfect trading system, flawed market mechanisms and inappropriate supervision systems” are three detriments to the Chinese stock market as well as to other financial markets like real estate. (New York Times, 2016)

The reminder of this proposal is organized as follows: the next section demonstrates the background and motivation of the research topic. Section 3 reviews literature on switching costs and also provides some relevant studies on firms’ choices of remaining a single relationship or initiate multiple relationships. Section 4 discusses institutional background and history of China’s banking industry and its reforms. Some literature on China’s banking market and effects of reforms is also included in this section. The last section discuss about my future studies.

Compared to global standards, the development of China’s financial market still remains an early stage. It has existed for only 25 years since Deng conducted the reform and opening-up policy in China. As a result, the market is not yet mature and full of rumors and speculators. Mom-and-pop investors who have only limited understanding of what the market is and, more importantly, how it works are everywhere in the stock market. These individual investors drive more than 80 percent of trading on bourses in Shanghai and

It has been noted that most cross-border mergers take place among firms in developed countries and that firms with high levels of intangible assets or research and development (R&D) intensity are natural candidates for cross-border mergers (Sonenshine and Reynolds, 2014). This is because, the combined firm needs to spread the high fixed cost of R&D expenditures and knowledge asset attainment over large foreign markets. The African M&A market has been trending upwards over the past few years, although it is quite small compared to other M&A markets worldwide. The attractiveness of the African continent for M&A deals is mainly due to the high economic growth in energy, mining and utilities sectors.

Based on table 1-1, although not all the announced mergers and acquisitions are completed during a year, the percentage of completed mergers and announcements for both years 2011 and 2012 is more than 70% (2011 = 70.32% and 2012 = 72.77%). This is a good indication to a developing country like Malaysia because more than 70% of announced mergers and acquisitions are completed during a year. The increasing value of mergers and acquisitions over the years has motivated this study to examine whether the mergers and acquisitions activities does provide a fair return to the acquirers companies especially in term of the share prices changes. Therefore, it is important to examine whether there is any abnormal returns around the announcement period. However, if the market is efficient, we should expect the impact of mergers and acquisitions only take place on the day of announcement while the other days around the event windows will not generate significance different in abnormal returns.