Mergers & Acquisitions

• Anti-Sandbagging And Other Anti-Ambush Clauses In Merger Agreements

Investment Banking & Broker/Dealers

• Investment Bankers Size Up 2007 Prospects

Global Markets

• Rocky Yet Promising Road Ahead For China's Banks

Private Equity & Venture Capital

• Corporate Expectations For Venture Capital's Noncash Support Exceed The Results

• How To Avoid Major Private Equity Pitfalls

• Best Exit Is Still An IPO ... Except When It Is A Private Sale

Initial Public Offerings

• Institutional Investors Reap Greatest Returns From IPOs

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Rocky road to success. As many investment bankers have learned over the last few years, China's economic forces have a far-reaching (and growing) impact on the world's markets. Today, the banks central to economic growth in that region face new challenges and opportunities, which will shape their destinies for years to come, reports Thomas Clouse. Chinese banks operate on a huge scale in terms of their loans, branches, deposits, and even their increasing attractiveness to global investors. Reform measures have refined their risk control and corporate governance mechanisms, while their profits remain strong. At the same time, challenges loom. Government limits on deposit and loan rates, which have kept the former low and the latter significantly higher, could be lifted in the next few years. The country's buoyant equity market threatens to lure deposit and loan customers, including Chinese companies that may decide to raise capital by issuing stock instead of borrowing from banks.

Change in the wind. To remain competitive, Chinese banks will need to develop and maximize other sources of income (e.g., credit cards and fee-based services) and to make loans to small and medium-sized businesses, which are generally more profitable than state-run enterprises. Establishing relationships with these smaller businesses will require a greater knowledge of sophisticated risk assessment and pricing techniques than many of China's banks currently have. The bankers will need to become better versed in bank M&A, which should become more commonplace as large domestic and international banks compete for the smaller financial institutions. For now, monitoring and controlling growth is a major concern, the author notes. Investors and currency speculators are flooding bank vaults with new money, raising the government's fears of an overheated economy. The rapid growth of bank loans in 2006 prompted policymakers to raise interest rates, introduce other tightening measures, and limit loans to certain industries. While lending growth has cooled to a more measured pace, concerns remain that speculators could drive the country's hot stock market to dangerously unsustainable levels. As leaders evaluate ways to continue tightening without choking off growth, many expect the Chinese stock market to remain strong.

The trade imbalance time bomb. The country's trade relationships are becoming more complex, as demand for its goods and services remains strong and world economies rely more heavily on its economic growth. China's exchange rate is linked to a basket of currencies, rather than market rates, and follows the value of the US dollar. Critics charge that this provides an unfair advantage by keeping the cost of Chinese exports artificially low. Protectionist measures appear more likely under a US Congress controlled by Democrats, yet they could pose a threat to China's economic expansion. However, such measures may help in the long run by reducing China's dependence on foreign trade and prompting lawmakers to search for ways to boost domestic consumption. Allowing the yuan to appreciate more rapidly would decrease the price of imports and encourage spending, the author points out, but the Chinese financial system may not be prepared for such a shock. Instead, the central government is working to increase domestic consumption through other measures. It may require state-owned companies to pay dividends, thereby putting money in the hands of Chinese investors and increasing government revenue for social services.

Abstracted from Global Finance, published by Global Finance Media, 411 Fifth Avenue, New York, NY 10016. To subscribe, call (212) 447-7900; or visit www.gfmag.com.