Mongolia fends off Chinese bank suitors
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Northeast Asia

Mongolia fends off Chinese bank suitors

China’s big lenders, led by Bank of China, want full access to Mongolia’s resource-rich market, but local regulators are desperate to keep them out, wary of Beijing’s rising power and influence, and keen to avoid a repeat of past mistakes. Who will win the battle?


A visit to Central Tower in the Mongolian capital Ulaan Baatar is quite an eye-opener. Here are five global banks crammed into a tiny patch of real estate, all with ample time on their hands and vanishingly little to do.

The quintet – Dutch lender ING, Japan’s Sumitomo Mitsui Banking Corporation and Mitsubishi UFJ Financial Group (MUFG) and the Chinese duo of ICBC and Bank of China – are not idle by nature, of course, but by circumstance. Suffocating local laws hinder them at every turn, limiting each bank to operating and occupying a single onshore representative office.

Denied the right even to apply for a full-service banking licence, they exist in Mongolia in a kind of financial limbo. Occasionally, their professional skills are called upon, as happened when Development Bank of Mongolia briefly roused the long-dormant capital markets with its $500 million, five-year bond issue in October. 

But mostly they slumber away, performing less lucrative tasks: running local market research on the resources-heavy frontier state, escorting visiting institutional investors around town or doing a spot of correspondent banking.

At sunset in summer, Central Tower crackles with energy as crowds of young people head to the Sky Lounge bar on the 17th floor to sip cocktails and gaze out over the steppe. But in early winter, the building is eerily quiet. The first snows of the season fell the day Asiamoney visited, wreaking havoc on Ulaan Baatar’s cracked and traffic-choked roads. There are no pedestrians on the chilly streets, while the unlit offices appear empty. Many white-collar workers have chosen to take the day off, or skip out early. 

Bank of China should be saying: ‘You can trust us, we are just a harmless baby yak, so please give us a banking licence’. But instead, their offices are grand and boastful and reflect their objective, which is to dominate local retail and corporate banking - Former central bank official

There is no one, not even a dozing security guard, in Central Tower’s cavernous lobby. Up on the seventh floor, most of the lights are off inside ING’s rep office; the only sign of life is a secretary who sits filing her nails while she listens to the radio. Two floors further up, MUFG’s doors are shut firm. On the 10th floor, the lift doors open to reveal three young men in crisp suits, locking up for the day at Sumitomo Mitsui. It’s life in slow motion: the inevitable result of running a rep office that only comes alive a few times a year.

But all that lassitude disappears the moment you enter Bank of China’s rep office. Just walking through its doors is like a splash of cold water to the face. 

“Go and see them,” a foreign banker suggests during a meeting earlier that day. “They’ve got the entire 11th floor, and the whole place shines.”

He isn’t lying. Whereas ING’s one-room office, all thick carpeting and heavy wooden furniture, is barely visible beyond the half-light of a dingy corridor, Bank of China’s local headquarters gleam. High-backed chairs are dotted around the brushed carpeting, interspersed with long rows of airport-style benches, while signs hanging above clusters of tables mark where foreign exchange and bulk orders take place. A giant flat-screen TV broadcasts rolling images of smiling yak herders and the latest currency rates. The entire floor is one vast interlocking room, partitioned by glass doors and flooded with light glinting off the falling snow. It screams ambition.


Yet there’s something wrong. To the left of the reception area stands another little table, adorned with a single blue peony. This, according to its accompanying sign, is the customer waiting area. Only there are no customers. In fact, despite being open to all-comers, the entire floor is utterly empty.

A young woman finally appears, looking baffled and a little annoyed at the intrusion. She takes the offered business card and promises to pass a message to her boss. A request to interview Bank of China’s Mongolia country manager – to discuss what the Chinese lender wants to do and achieve here – is relayed back to Beijing, where it wanders up the value chain, before getting lost.

Later that evening, over drinks with a former central bank official, talk turns to the bank in question.

“They are sending the wrong message,” he mutters, shaking his head. “Bank of China should be saying: ‘You can trust us, we are just a harmless baby yak, so please give us a banking licence’. But instead, their offices are grand and boastful and reflect their objective, which is to dominate local retail and corporate banking. That is exactly what everyone here is afraid of.”

Are all foreign banks perceived as threats?

“No, just Chinese ones,” he replies with an embarrassed shrug. Another bovine analogy is offered up.

“Think of a Mongolian ger [a fixed, tent-like structure similar to a yurt]. Now take our baby yak. It comes to live in the ger and a few years pass and by now it’s a really big yak. By now it has destroyed the ger and gone on a rampage. That’s the threat we perceive from Bank of China. Remember, in asset terms alone, they are 250 times the size of our economy.”


To some, that comparison might seem spurious. Yes, with $3 trillion in assets, the outward-looking Chinese lender is enormous when set alongside the east Asian state (Mongolia’s GDP is $11.5 billion). But to a country proud of its long and turbulent history, it resonates.

Every adult Mongolian in this giant, landlocked state is aware of the events that led it to declare independence in 1911. During the last years of the Qing Empire, it was called Outer Mongolia and was loyal to Beijing. As imperial China fragmented, traders from Shanxi province, then the region’s main financial centre, lent silver across the border to itinerant Mongolian herders, who were told to repay their obligations in the form of livestock.

Many ended up locked in debt, their herds depleted. In the ensuing revolution, Mongolia turned to Moscow for protection. The tsar sent in his troops, the herders burned their debt certificates, and Ulaan Baatar drifted away from Beijing.

A century on, Mongolia is still poor, but it is fiercely independent and has no desire to see another country impinge on its hard-won sovereignty. Its great fear is getting in hock again to Beijing – a problem facing many countries that have come to rely heavily on China for financial and economic support – and of giving mainland lenders free rein to operate across its territory. 

A report from Oxford Business Group, a global consultancy, in 2014 pointed to an ingrained fear of better-funded foreign lenders virtually wiping out the local banks.

“Imagine we borrow and we cannot meet our debts,” the former central bank official says. “Maybe China asks us to give them a coal mine in lieu of debts, or a half-share in [the copper mine at] Oyu Tolgoi. If we say no, what if they close the border? China accounts for 80% of our exports.” 

China is like a hacker. It prods around, locates your weakness, then breaks in. Beijing wants its banks to be here, and eventually it will get what it wants - An official

For now, Mongolia has avoided that particular fate but, like many small states, it has succumbed to the temptation to dip into Beijing’s coffers. China’s Belt and Road Initiative, or BRI – president Xi Jinping’s ambitious drive to revive the old trade routes across Asia, Europe and beyond – also includes the China-Mongolia-Russia Economic Corridor.

In 2016, Export-Import Bank of China lent the country $1 billion to build a hydropower plant and a highway linking the capital to its airport. A year later, in the wake of a $5.5 billion IMF-led bailout, the central banks of both countries agreed on a three-year extension to a $2.2 billion debt swap, Ulaan Baatar’s largest single source of foreign financing.

In March 2018, the Centre for Global Development, a Washington-based non-profit organization, identified eight countries it deemed highly financially vulnerable to participation in China’s grand plan to redraw the trade map in its image. Mongolia is on that list, along with Pakistan, Laos and the Maldives.

“Mongolia is in a particularly difficult position because its future economic prosperity depends, in large part, on large infrastructure investments that will increase productivity and facilitate exports,” the report says.

The report notes Exim Bank’s credit line for the hydropower and highway projects. “According to local reporting, the hydropower project has stalled, and elements of this financing are reportedly being redirected to other projects,” it says. “But if reports that Beijing expects to channel some $30 billion in credit to BRI-related projects over the next five to 10 years are true, then the prospect of a Mongolia default is extremely high, regardless of the concessional nature of the financing.”


Dependence on an economically dominant neighbour gives Beijing leverage over Ulaan Baatar, at least in theory. Bank of China has been present in the country since securing a rep office licence from the Bank of Mongolia (BofM) in 2012. With each year that passes, the lender ramps up the pressure, pressing local authorities to give it what it wants: a licence to lend directly to citizens and corporates.

“The conversation happens constantly, at every level,” says a figure close to the central bank. “When Xi Jinping visits, he mentions it. When the sovereign borrows from Beijing, or from one of their banks, it is part of the talks.”

Bank of China appears to be the only foreign outfit that actively pursues a commercial banking licence.

“They constantly express their interest,” says a local banker. “No one else does.” 

It is understood that the central bank, which regulates the industry, has approached every foreign bank present in the country to gauge their level of interest in seeking a full operating licence.

One of those institutions told Asiamoney it had zero interest in lodging an application, even if it was encouraged to.

“There’s no clear business case to be here, no big foreign investment project other than Oyu Tolgoi,” says one foreign banker. “We would only want a bigger licence if we could see a multi-product, multi-company opportunity, and Mongolia does not offer that.” 

After all, commercial banking syndicates, agencies and multilaterals externally finance most of the big-ticket investments in Mongolia. All three non-Chinese foreign lenders operating in the country decline to comment on the record.

Another banker says: “We do fine here. Having a rep office in Ulaan Baatar is not expensive. We have good relationships across Asia, we clear dollars and euros, and we accompany the big institutional investors around when they come to town. But we are definitely not going into retail banking. We had a conversation to enter a strategic partnership with a local bank, and we declined the offer.”

Revised guidelines

In future, the regulator will have to come up with new and creative ways to rebuff the advances of Bank of China and, in time, of Industrial and Commercial Bank of China, the largest mainland lender by assets and market capitalization, which opened a rep office in the capital in September 2017.

This, insiders say, is taxing minds at the central bank. 

“The regulator doesn’t reject outright the idea of allowing foreign [non-Chinese] banks to operate as commercial lenders, in a limited and responsible way,” says one official. “But you can’t let one in without letting China’s banks in. So, you have to flatly reject them all.”

So far, the central bank’s approach to keeping the barbarians outside the gates, has been to put the cost of a full banking licence all but out of reach. In 2012, BofM introduced rules that allowed foreign lenders to incorporate and operate locally, so long as their rep office was at least 12 months old, and they were able to provide Tug65 billion (then $38 million, now $25 million) in paid-up capital.

In early 2017, the central bank revised its guidelines, drawing up a draft foreign banking law that required any licence-seeking foreign lender to stump up at least Tug500 billion ($192 million) in paid-up capital.  

The draft law was a repelling instrument that was never designed to work - An official

Even in the event of the money being found, and an application being lodged and approved, foreign banks “would still have been restricted to disbursing commercial loans with a minimum value of $40 million,” says an official who saw the document.

“So, you’d be pretty much limited to financing operations at Oyu Tolgoi, as there is nothing else of that scale in the country,” the official adds. “The draft law was a repelling instrument that was never designed to work. Even China’s banks could not have justified the cost, and besides, the capital involved would have overwhelmed the entire system.”

Later that year, the central bank took an axe to its own draft, supplanting it wholesale with a proposed brokerage law that would allow banks to trade shares on the tiny Mongolian Stock Exchange, but not to disburse capital in the form of loans. And the effective cost of securing a freshly altered licence was set at $80 million. 

“It was a complete nonsense, just like the first draft law,” says an Ulaan Baatar banker.

Regulators are painfully aware that they cannot string China along indefinitely. “Mongolians are pretty good at saying no to people who want something from us,” says the chief executive of a local lender. “The central bank is careful not to put itself in the position of actively having to turn Beijing down. But they cannot carry on doing this for ever. They’ll have to come up with a more honest and straightforward solution or, if history is any guide, Beijing will find ways to make life harder for us.”

That might include any number of actions designed to cut the country off at the knees, or simply to inflict a short, sharp shock – a reminder of where the power lies. Beijing might for instance annul the bilateral debt swap, close the borders, or put a go-slow on imports of coal or copper. Mongolia would seethe, and the world might wag a collective finger, but Beijing would still hold the whip hand.


Local regulators know they cannot be accused of being tacitly anti-foreign: most of the country’s first-tier banks are part-owned by foreign individuals and institutions. Khan Bank, the largest onshore bank, is 41.3% owned by Japan-based Sawada Holdings, while Swiss-Mo, an investment firm controlled by the Switzerland-based hotelier Urs Schwarzenbach, controls a 9.2% stake in Golomt Bank.

The central bank is a solid institution well run by sensible individuals. It knows it will have to come clean at some point, deciding either to extend a full banking licence to the only foreign financial institution desperate to lend directly into the local market, or to turn Beijing down flat and face the consequences.

But the door swings both ways, and Bank of China could be doing a better job of selling its case to regulators as a responsible and judicious banking partner. Was it sensible to refurbish an entire floor of Ulaan Baatar’s priciest commercial building so ostentatiously, tacitly announcing its outsized intentions in a country fearful of its power, suspicious of its motives and determined not to repeat the mistakes of the past?

Individuals close to the central bank also told Asiamoney there has been some confusion about the lender’s local ambitions.

“Their plans often change from one month to the next,” says one official. “In one meeting, they might tell us their focus would be to target small firms and the retail segment. In the next, all the talk is about financing large corporates and projects. Or they might say they only want to be a small bank, only to identify their big long-term competitors as Golomt Bank or Khan Bank. [Each one is] a completely different proposition.”

Asked if Bank of China will, sooner or later, secure full access to the market, the official thinks for a long while, then nods. “Yes, because they are patient. 

“China is like a hacker. It prods around, locates your weakness, then breaks in. Beijing wants its banks to be here, and eventually it will get what it wants. Our current government is strong, but perhaps the next one will be more pliant. They will get in, in the end.” 

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