In what some are calling a show of Chinese economic strength and its increasing ability to compete with the United States as a world economic power, the Industrial & Commercial Bank of China (ICBC), China’s largest bank, purchased the Prime Dealer Services unit of Fortis Securities for a nominal fee of $1 to facilitate the transfer. The DealBook blog in the New York Times says Fortis Securities, formerly an American brokerage firm, was a victim of the financial crisis in 2008 and was under the control of French bank BNP Paribas at the time of the sale.
While technically not an American firm any longer due to its control by a French bank, the purchase of Fortis Securities by China’s ICBC is significant because it shows that China is not afraid to dip its toes into the world economy and share in its risk and rewards. Hugh Collins in Daily Finance reports that the Chinese government owns 70 percent of the Industrial & Commercial Bank of China, so it can be inferred that this was an action that China encouraged, if not mandated. As such, it isn’t far-fetched to say that this purchase, which will bring in a mere $15 million in annual profits, is more about appearances than performance.
Any American company could have purchased the brokerage firm for $1. To be sure, if I had a guaranteed $15 million return on my $1 investment, I wouldn’t blink before buying. But that isn’t the way the world financial markets work. It isn’t guaranteed. If another economic catastrophe occurs, China and the ICBC could be liable for Fortis Securities’ losses. By going ahead with the transaction, China and the ICBC have signaled that they aren’t afraid.
Due in large part to its currency valuation, which has kept the Yuan cheap in comparison to US dollars and other world currencies, China has been able to amass enormous trade surpluses by selling its cheaply made goods for minimal costs around the world. China is awash with cash, both its own and other world currencies. It has also been stockpiling gold, Canada’s Financial Post reports, giving it a strong foundation from which to weather economic fluctuations or financial cataclysms, such as a change away from US dollars as the dominant world currency.
The purchase of Fortis Securities by China’s ICBC in and of itself is but a minor transfer of ownership. However, it is significant in that it is representative of China’s increasing desire to appear on the world financial stage and to show that it is indeed willing to take risks. China will be, if not already is, a financial force to reckon with.
Collins, Hugh. (November 1, 2010). China’s ICBC Buys Fortis U.S. Unit for $1.
DealBook. (November 1, 2010). I.C.B.C. Buys BNP Paribas Brokerage Unit.
FinancialPost. (Apr 24, 2009). China Admits to Building Up Stockpile of Gold.