[The following article is from Economist, which describes the background of a takeover of a Hong Kong bank by a Chinese bank. It gives readers hints of the energy that the booming Chinese economy contains.]

Taking Wing

Jun 5th 2008 | HONG KONG
From The Economist print edition
The first big takeover by a mainland bank outside of China

IT CAME down, in the end, to a fight between an aggressive Australian bank with a new boss who has China in his sights, and keen Chinese banks wanting a quick route to the outside world. The result reflected the new financial pecking order: China won.

In the past year Chinese banks have bought tiny foreign operations, or made minority investments in larger institutions, but on June 2nd China Merchants Bank became the first to launch a big takeover: it said it would buy Hong Kong’s Wing Lung Bank for $4.7 billion. Founded in 1933, Wing Lung survived a forced relocation to Macau during the Japanese occupation, as well as many financial crises. Its strength came from strong local ties and 70 years of leadership by two brothers. One died in 2005; the other in 2008. Following that, the family squabbled and the bank went on the market.

China Merchants’ logic in buying Wing Lung is sound. It is based just over the border in Shenzhen, and the two banks potentially serve a pool of the same business clients who often have factories in southern China and sales offices in Hong Kong. Dealing with a single bank would make their lives easier. As a bonus, Wing Lung comes with a branch in California that will enable China Merchants to add to the New York branch that it won permission to open only last November. Chinese companies are expanding overseas. There will be opportunities for the banks that can go with them.

The benefits were different, but equally compelling for ANZ, the losing bidder. Trade between China and Australia is growing quickly, and in April New Zealand and China signed a free-trade agreement; ANZ is expanding throughout South-East Asia. Acquiring an established bank in Hong Kong, the regional financial hub, would, by itself, have benefits. But Wing Lung also had operating licences in China that would have tempted ANZ’s chief executive Michael Smith—when he was head of HSBC in Asia, he pushed the British bank deeper into the mainland.

Bidding for Wing Lung was fierce, but it could have been fiercer still. No other local Chinese-owned Hong Kong bank was allowed to put forward an offer, so as to prevent Wing Lung from losing face, says one banker who was blocked. ICBC was the only state-controlled Chinese bank to make an offer, which made the sellers a bit nervous. China Merchants Bank, which is private, decided to bid after its adviser, JPMorgan, bypassed the formal process and went directly to the selling family members. The offer, at 3.1 times book value, was high and far more than ANZ or ICBC was prepared to pay. A deal was quickly struck.

Wing Lung has seen better days. In March it declared its first loss since going public in 1980, because of bad investments tied to American subprime debt. But the lure of Hong Kong made that an irrelevance. Three other big Hong Kong banks—Wing Hang, Dah Sing, and Chong Hing—remain independent. Not surprisingly, the shares of all three are up sharply (see chart). The race to get into, and out of, China is heating up.