Brian Gaynor: China's banks building their NZ presence

It was smiles all round as China Construction Bank's Auckland branch was opened this month.Photo / Greg Bowker

China Construction Bank is the third Chinese bank to incorporate in New Zealand and be registered as a bank by the Reserve Bank.

The three Chinese banks have a relatively small presence in this country but they have a massive opportunity to expand because Industrial & Commercial Bank of China is the world's largest bank, China Construction Bank is the third largest and Bank of China is the fifth largest global bank.

The three banks are huge, with average assets of US$3,380 billion ($4.6b), compared with New Zealand's total banking assets of just US$370b.

The Chinese banks seem to have adopted a politically oriented strategy in New Zealand, as former Prime Minister Dame Jenny Shipley is the chair of China Construction Bank (New Zealand), former National Party and Act Party leader Dr Don Brash is chair of Industrial & Commercial Bank of China (New Zealand) and former Napier National Party MP Chris Tremain is chair of Bank of China (New Zealand). Ruth Richardson, a former Finance Minister, is also on the Bank of China (New Zealand) board.

This is a strange strategy as most NZ politicians haven't made a hugely successful transition from parliament to the board table.

The less than successful moves include: Wyatt Creech and John Luxton to Blue Chip; Sir Roger Douglas, Fran Wilde and Philip Burdon to Brierley Investments; Dr Don Brash and John Banks to Huljich Wealth Management; Sir Douglas Graham and Bill Jeffries to Lombard Finance; Sir William Birch to Viking Pacific (now NZX listed AFC Group) and Ruth Richardson to Dairy Brands and Syft Technologies.

Foreign owned banks completely dominate the New Zealand financial sector, as illustrated in the accompanying table. Twenty of the country's 25 banks are overseas owned, with 10 incorporated locally while the other 10 are branch offices.

The four large Australian owned banks account for 86.3 per cent of total bank assets and the 20 foreign owned banks have accumulated 92.5 per cent of the country's bank assets.

The 20 overseas owned banks dominate the New Zealand business sector in several ways, including:

• They generated total net earnings after tax in the past financial year of more than $5.0b compared with net earnings of just $3.5b for the 20 largest listed NZX companies.
• The four major Australian owned banks reported net earnings of $4.7b last year while the four largest NZX companies had net earnings of just $0.7b.
• ANZ, ASB, BNZ and Westpac paid nearly $3.5b in dividends to their Australian parents last year.

In addition, the banking sector has increased its share of KiwiSaver from 58.6 per cent at the end of 2013 to 66.9 per cent at the end of 2017. Banks also face less competition following the collapse of the finance company sector.

A 2017 IMF Working paper, Bank Ownership: Trends and Implications, shows that New Zealand is near to unique in terms of bank ownership.

The study looked at 90 countries — 26 developed countries and 64 developing. The IMF assessed New Zealand as having 95 per cent of its banking assets under foreign ownership. Only four countries had more offshore ownership. These were Fiji, Estonia, Belize and Madagascar.

More importantly, the other 25 developed countries had average offshore bank asset ownership of 34 per cent compared with New Zealand's 95 per cent.

The IMF paper concluded that "the evidence indicates that foreign-owned banks tend to be more effective in developing countries, typically promoting competition in a host country banking sector".

However, the situation in developed countries can be different as foreign bank ownership may have a negative impact on credit levels if "foreign banks were brought in to recapitalise failing banking sectors".

The acquisition of the Bank of New Zealand by National Australia Bank is an example of this.

Bank concentration is an issue in New Zealand, with the four major Australian owned banks accounting for 86.3 per cent of total assets. This makes it extremely difficult for small NZ banks to compete against the Australian giants or for new foreign-owned banks to make significant headway.

In this light, the appointments of former politicians Shipley, Brash, Tremain and Richardson to the Chinese banks' boards is fascinating.

Does this signal that the Chinese banks have a long-term strategy to acquire the NZ operations of an Australian bank and, to get approval, they want to develop closer ties with key political figures?

The position of former PM Shipley is consistent with the Chinese regard for former senior politicians.

Shipley joined the Richina Pacific board in April 2004, when the company had several diverse operations including a Shanghai tannery, a Beijing aquarium and Mainzeal New Zealand. Her appointment was partially aimed at giving Richina Pacific credibility in the eyes of Chinese government officials.

The former Prime Minister was appointed chair of the Mainzeal Property & Construction board.

Shortly after Shipley joined the board, Richina Pacific purchased an old-fashioned Chinese state-owned enterprise with a huge range of diverse activities, including large land and property holdings in Shanghai.

Meanwhile, Mainzeal lost $22.2 million on a $72.6m fixed contract to build Auckland's Vector Arena.

In 2008, Richina Pacific put a proposal to shareholders to split the company into four divisions and delist from the NZX. Chairman John Walker, a New York lawyer, wrote that "trading in Richina Pacific shares has been at minimal levels, and we believe the nature and location of the company's businesses and assets are better suited to a corporate organisation and structure that is more private equity related".

He added that shareholders "will be protected by appropriate safeguards for minority interest in the bylaws of the resulting entity" while the investment statement promised "a copy of every balance sheet and statement of income and expenditure, including the auditor's, would be sent to every person entitled thereto in accordance with the requirements of the Bermuda Companies Act".

The delisting motion was approved by 88.54 per cent of votes cast at an acrimonious meeting in Auckland on December 15, 2008. Shipley defended the delisting but there were only vague answers to shareholder questions about the value of the land and property holding acquired through the 2004 purchase of the Chinese state-owned enterprise.

Sir Paul Collins, the former Brierley Investments chief executive who owned 5 per cent of Richina Pacific through Active Equities, also supported the delisting motion. He was subsequently appointed to the Mainzeal board.

This columnist held onto his 1026 Richina Pacific shares to see if the directors would meet their 2008 promises.

The simple answer is that they haven't. No annual report, notice of meeting, dividend or any other correspondence has been received since 2009.

Meanwhile, there are reports from China that many investors who acquired Shanghai land holdings through Chinese state-owned enterprises have made a fortune but Richina Pacific shareholders have received nothing.

Mainzeal collapsed in February 2013 and the liquidators, assisted by a liquidation funder, are continuing to take legal action against several directors including Shipley, Collins and former Richina Pacific chief executive Richard Yan.

This legal action, which is scheduled for a six-week High Court hearing starting on September 3, will determine what return Mainzeal's unsecured creditors will receive on their $117m of admitted claims.

Former PM Shipley is still the chair of China Construction Bank (New Zealand) but there is a strong argument to be made that she has also joined the list of former politicians who haven't been as successful at the board table as they were in politics.

- Brian Gaynor is an executive director of Milford Asset Management which owns shares in Heartland Bank and the four large Australian banks with NZ operations. His personal Richina Pacific shares are probably worthless.