By Craig Stephen
HONG KONG (MarketWatch) -- The problem with having enough cash on your balance sheet to bail out a medium-sized country is that everyone has a use for it. Last week, China Mobile revealed some loose change from its $30 billion-plus cash pile would be used to buy a 20% stake in Shanghai Pudong Development Bank.
It might have been only a $5 billion investment, or just 3% of China Mobile's /zigman2/quotes/200868736/delayed HK:941 -2.20% /zigman2/quotes/204514293/composite CHL -0.52% market cap, but investor reaction was brutal, wiping over $10 billion off its total capitalization.
Rather than try to piece together what was happening as the news dripped out, investors hit the sell button. The stock, the largest Hang Seng Index constituent by market cap, was 6% down on the week.
What exactly is a mobile operator doing buying a bank, and a regional one at that?
The simple lesson appeared that, when it comes to being an investor alongside the mainland Chinese government, minority interests come well down the pecking order.
China Mobile's unusual detour from its core business raises concerns the 75% government-owned mobile behemoth is doing the state's bidding by taking up the cash call by Pudong Bank ahead of its listing. It looks like a handy fix, with a line of mainland banks scrapping for funding after last year's lending splurge -- and China Mobile has the readies.
Usually when the No. 1 carrier has had to make questionable 'national interest' investments, such as building out China's home-grown 3G standard, it gets its parent to pick up the tab and keep the listed-company investors on side.
Although not always. Similar questions were asked when a 20% stake in Phoenix Satellite TV /zigman2/quotes/201443277/delayed HK:2008 +1.56% /zigman2/quotes/210326763/composite PXSTF +75.00% was purchased in 2006 at a reputed price of 30 times earnings. Rumors existed that the authorities wanted News Corp. /zigman2/quotes/209121543/delayed AU:NWS +1.11% to be replaced by a state-owned shareholder as the regulatory climate for foreign TV chilled. China Mobile again stepped up. [News Corp. is the owner of MarketWatch.]
If the state really would like to put cash into Pudong Bank /zigman2/quotes/204296742/delayed CN:600000 -0.32% , a better solution would be to declare a special dividend for all shareholders. Then everyone can decide if they want to put this cash to work in a mainland bank.
And what if Pudong Bank or someone else needs more cash infusions? When push comes to shove, will China Mobile again provide a cash top-up, citing synergies?
The reported comments from China Mobile's chairman were that the tie-up was synergistic, although further details were not released.
That might well be the case, but on the surface, it still looks hard to justify the investment. That could change, depending on how ambitious China Mobile will be with mobile banking.
As it stands the operator already has a mobile payment arrangement in place with the major banks, without needing to make an investment. Goldman Sachs writes they are unaware of a precedent of a telecom investing in the equity of a bank to facilitate co-operation. In Japan and South Korea, there have been carrier investment tie-ups with credit-card companies, again to facilitate payment.
Where the opportunity could get more interesting is the area of facilitating money transfers, especially for the migrant community or in less-developed regions of China. In remote or rural areas, it's more common for people not to have a bank account. Worldwide, one billion people have mobile phones but not a bank account, according to the GSMA.
With 500-million-plus subscribers and its hugely successful added-value services interface in Monternet, there is clearly massive potential to scale new banking initiatives.
To date, mobile money transfers are a niche and heavily regulated business to guard against money-laundering abuse. This type of mobile banking can allow long-distance money transfers: For instance, in some countries in Africa, pre-paid minutes are used a proxy for cash and exchanged for goods.
Not surprisingly, these services exist where traditional banking services are limited. But take it further and you could have full deposit and lending services, be it with minutes or cash. China Mobile could mobilize the hefty cash advances it receives from its pre-paid cards.
Incumbent banks, however, would surely protest strongly at the mobile giant barging in on their market. Perhaps this is an explanation why China Mobile has so far kept everyone in the dark on its plans.
Until we hear more, few investors are willing to offer the benefit of the doubt. As befits its size, China Mobile is likely used to doing as it pleases, but it has also learned silence can be expensive.