Oct 18 - 24, 2010

China plans to buy out a Pakistani bank instead of establishing a new bank in the country. State Bank of Pakistan (SBP) has reportedly been directed by the President Asif Ali Zardari to remain in touch with Chinese central bank to finalise a feasible proposal in this regard. Zardari's directive came at meeting in Islamabad last month as follow-up on his fifth visit to China that took place in July. Leading industrialists and business executives including Yang Kaisheng, President of Industrial and Commercial Bank of China (ICBC), the world's second largest bank, had called on Zardari during his visit to China in July. The Chinese banking giant ICBC has already shown interest in exploring the possibility of establishing its branches and acquiring Pakistani banks to provide financial services.

China has broad interests in Pakistan, and its experts are working on a number of mega projects in different sectors worth billions of dollars. Presently many Chinese companies are interested in making investments and establishing joint ventures with local companies in the country. In 2008, China's investment companies and industrial firms had offered to invest $5 billion in the country's different economic sectors including defense, banking, oil exploration, and mining. Analysts believe that presence of a Chinese bank in Pakistan will provide financial support to Chinese companies, which are exploring investment opportunities or engaged in infrastructure development and financial business in the country.

Pakistan and China signed six accords to increase economic cooperation in different sectors during the five-day official visit of President Zardari to China, which concluded on July 11. In August, Vice President and Executive Director of the Board of ICBC Ms Wang Lili met with president Zardari in Islamabad, which was the follow up of Zardari's meeting with the ICBC President in Beijing. In his meeting with Zardari on July 7, the ICBC president Yang Kaisheng had expressed his keen interest in exploring investment opportunities in the South Asian country.

Analysts believe that various areas including oil and gas exploration, ship building, and industrial sector provided excellent opportunities for the Chinese Banks to consider investment and set up branches in the country. The existing investment and trade equations between the two countries is expected to further enhance if important Chinese banks like ICBC start operations in Pakistan.

ICBC is the largest state-owned bank in Asia and fourth-largest in the world offering a wide range of financial products including personal and corporate banking services, global services, e-banking, Bank Card and more. It is a leading financial player in China with a large customer base and multi-dimensional business structure. Over the past few years, ICBC is building its own team of international staff while growing its overseas presence. Presently, ICBC has 175 overseas branches and subsidiaries in 22 countries/regions with an overseas workforce of nearly 3600. Out of them, over 90 per cent are foreign staffs.

In November 2006, Pakistan signed a Free Trade Agreement (FTA) with China in goods, investment, and services. With liberal incentives offered by the government, low cost labor, and access to the huge markets of countries in the region, Pakistan offers unique opportunity to Chinese investors to invest in the strategically located country. China's investment in the country has expanded from resources, home appliances to communications and finance.

Haier, the China's largest home appliance-maker has already entered the country with an initial investment of about $35 million to create a joint venture, called Haier Pakistan, with Ruba General Trading Company. Similarly, Zhongshan Changhong Electric Co. Ltd, the second largest state-owned electronics manufacturer of China, is presently in talks with the Pakistani authorities for setting up an assembling plant in the country.

The Haier-Ruba zone is the first overseas industrial zone established by China in the country's Punjab province. The project has been considerably delayed on the issue of sharing cost of land, as Haier-Ruba has refused to buy 4218 acres of land from its own pocket. Haier-Ruba has been insisting that land should be provided free of cost, or at subsidised rates. The government has proposed acquisition of about 3,000 acres of land in the name of federal government for development of economic zone for leasing out to Haier Ruba.

In December, Lumena Resources Corporation of China and KASB Group of Pakistan have already signed an MoU to promote China Industrial Zone in the country. The MOU encompasses conducting market survey, analysis, establishing an industrial park wherein Chinese companies will establish their business facilities, and exploring areas of mutual interest for joint ventures in the country.

Flood-hit Pakistan is presently beset by grave challenges on political, security and economic fronts. The country's economy witnessed a growth of 4.1 per cent in the last fiscal year 2009-10, compared to 1.2 per cent growth it witnessed in the previous fiscal year2008-09.

A challenging economic and business environment continues to affect the growth of banking industry in Pakistan. Deteriorating asset quality and high interest rates are likely to continue to hold back credit growth over the coming months. The surge in Non Performing Loans (NPLs) pose a challenge for the country's banking industry. The NPLs of the banking industry witnessed a rapid increase for the last one and a half years or so and almost doubled since calendar year 2007. Commercial banks' lending to private sector during the Oct-Dec quarter of last fiscal year 2009-10 increased by 4.16 per cent. Commercial banks seem reluctant to extend credit to the private sector.

Under a deal signed in 2007, the National Bank of Pakistan (NBP) and the ICBC had agreed to cooperate in the banking and financial sectors in both countries.

NBP is currently facing an increase in loan failures after the worst flooding in the country's history damaged farmland in areas where the bank lends. Flooding may hamper the bank's five-year target to recover 80 per cent of the non-performing loans that have been provided for, as about a quarter of its lending is to farmers. Pakistan's central bank said in August that it would ease rules for banks to help support growth in flood-hit areas adding there will be "substantial" increase in loan delinquencies.

"There will certainly be some impact on non-performing loans," Bloomberg reported Syed Ali Raza, the NBP's president, as saying. "The impact will be containable but it will be there."