American stick-up man Willie Sutton famously explained that he robbed banks "because that's where the money is." That's the same reason international financial institutions are snapping up stakes in China's banks. Last week, Royal Bank of Scotland (RBS), Britain's second-largest lender, announced that it is leading a consortium to buy 10% of Bank of China (BOC), one of the mainland's state-owned big four, for $3.1 billion—joining 12 other foreign financial institutions that have secured stakes in China's banks.
Such deals carry risks: while China's economy is as hot as ever, most of its lenders are abysmally managed. China has already pumped nearly $100 billion into its banking system to help clean up massive bad-loan portfolios, and it's hoping the wave of Western investment, which brings know-how along with cash, will speed the process. "With government-run banks, it's often as if nobody is really in charge," says Shenzhen-based business consultant George Gu.
In addition to a seat on the board, RBS will get first dibs on partnering with BOC in potentially lucrative future ventures like credit cards and wealth management. Despite the risks, other outsiders are sure to follow. At the end of 2006, according to World Trade Organization rules, international players will freely compete with domestic banks. "Benefits might not come overnight," said RBS CEO Fred Goodwin, "but they are certainly real."