Interest rates, currency, foreign ownership, politics. The new banking.

So “China” is buying into Australian banks.

Little more than 18 months ago Australian banks such as the market leader Commonwealth Bank and the ANZ were aggressively expanding into China and being welcomed as significant investors in the country’s relatively young though fast-developing financial institutions.

Yesterday one of the offshoots of a sector that has access to $US1.46 trillion ($1.7 trillion) of foreign exchange reserves showed there were two sides to an investment “partnership” by popping up as a shareholder in Australia’s three largest banks. Industry sources confirmed a report by the Financial Times in London that China’s State Administration of Foreign Exchange had acquired through a Hong Kong subsidiary, SAFE Investment Company, small parcels of shares in ANZ, Commonwealth and National Australia Bank.

Have Sydney Morning Herald readers been hit with a quota on commas? For Cliff’s sake, people: punctuation is your friend.

This story comes on the same day that Australian banks increased their variable rates on their mortgages.

A day after National Australia Bank lifted its variable mortgage rate to a decade-long high without waiting for official prompting, ANZ announced late yesterday it would raise fixed-rate mortgages by 0.25 percentage points from Monday to 8.54 per cent, just under the standard variable mortgage rate of 8.55 per cent.

The bank will have to increase variable mortgage rates by just as much or more so that borrowers have a reason to lock in a fixed rate.

Borrowers have been hit by rising interest rates on a range of products since the US subprime mortgage debacle triggered a global crisis.

Credit card and fixed interest mortgage rates have increased steeply, and well above Reserve rate rises.

The NAB’s new standard variable mortgage rate of 8.69 per cent is the highest charged by a major bank since 1996.

“The cycle has definitely passed us by,” the general manager of the research house InfoChoice, Denis Orrock, said. “There is no more cheap money.”

This is interesting for a few reasons. The latter story contains this incredible quote from our new Treasurer:

The Treasurer, Wayne Swan, repeated his call for banks to consider the impact on families of more rate increases.

“I would still ask them to be extremely mindful of the impact of those decisions on average Australian households with mortgages and, of course, business,” Mr Swan told ABC radio’s AM program.

That’s just plain funny. I wish him luck with that, although he clearly has forgotten that he’s referring to banks. Branch-closing, job-shedding, sector-consolidating multi-billion dollar profit-making banks. I’m just saying. I don’t think banks halt their march of profits for the sake of families, so much as laugh all the way to, well, themselves.

Of more relevance to debate is the foreign ownership issue, especially with regards to today’s macro – and global – economic bogey-man. In fact, the block-quotes above are deliberately misleading, not containing this piece of information:

It is understood SAFE has invested the equivalent of several hundred million of Australian dollars purchasing stakes of less than 1 per cent of each of the bank’s share capital as it seeks to get a better return on its money as opposed to what it could make on local currency markets.

In the case of the ANZ, the most active and biggest investor of the domestic banks in the Chinese financial services industry, it is believed that SAFE recently bought $200 million shares – about 0.3 per cent of the issued stock.

ANZ is capitalised at more than $52.4 billion, so SAFE’s investment is tiny compared with the shareholdings of the big institutions and superannuation funds that make up a significant proportion of the bank’s register.

As for the Commonwealth and NAB, which are valued at $76 billion and $60 billion respectively, SAFE’s share buying has been on a proportionally smaller scale, although the Chinese company is not obliged to publicly disclose the size of its investment until it exceeds 3 per cent.

Which is standard, textbook macroeconomics, now. Strong currency with interest-rate increases? Foreign capital is going to want some exposure to those margins. The very interesting aspect of this is two-fold: First, how will this play out in the court of public opinion (formed by garbage reporting/editorials), both now and if/as the level of investment increases? We’re talking about non-significant levels of foreign investment (along this vector, in this story), but that doesn’t mean it won’t affect hearts and (small) minds, even now.

Second, assuming specifically that this sort of thing continues, do we need, in a global economy, to start thinking more about how we measure competitiveness. Concentration ratios, for example, tell us that four firms make 99% of the cigarettes in the US. Already in 2000, Australia’s 5-bank concentration ratio was 72.5% – and it will only have been increasing, since.

Do we need, then, multivalent indices that include concentration in shareholder votes? Boards of directors are already ridiculously incestuous, but that one has gotten by Economics. Here is an opportunity to really construct a significant measure of who owns exactly how much of a given market, irrespective of where those owners are.

I’m not the first to this. At least one paper [Dahlquist, M and Robertsson, G. 2001. Direct foreign ownership, institutional investors, and firm characteristics,
Journal of Financial Economics, 59(3): 413-440]
, for example, considers concentration as a factor in foreign investment – not quite the same things, but similar thinking.

There is another excellent paper [Denis, C and Huizinga, H. 2004. Are Foreign Ownership and Good Institutions Substitutes? The Case of Non-Traded Equity. CEPR Discussion Paper No. 4339] looking at shareholder concentration specifically, and what factors make concentrated foreign ownership likely. Directly in their abstract, they make the point relevant to globalisation, “Empirical evidence supports the hypothesis that foreign ownership of non-traded equity is higher in countries with poor investor protection.” We will get worked up about foreign ownership when it comes from (let alone is concentrated in) countries with poor disclosure/oversight, but I’m willing to bet that we, in turn, go to markets with fewer prying eyes as well.

Anyway. Just a thought. I’m sure many PhD students at least are already working on it.

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