Shareholders approve $36b CITIC asset deal

Minority shareholders of Hong Kong-listed CITIC Pacific have approved a landmark deal to acquire $36 billion of assets from its State-owned parent CITIC Group Corp, China's biggest and oldest financial conglomerate.

The go-ahead clears the way for the purchase of practically all of the conglomerate's assets. In doing so, shareholders endorsed not just China's ambition to reform its State-owned enterprises. They also backed a plan to give CITIC Pacific direct exposure to the mainland's banking sector, and along with that, the country's bad loans problems.

"This landmark transaction will transform our company, giving our shareholders enhanced return, better earnings visibility, and a much bigger-scale platform," CITIC Pacific Chairman Chang Zhenming said in a statement.

The purchase was approved by 99 percent of votes at Tuesday's meeting, according to a securities filing.

Yet how CITIC Pacific plans to chart a safe and rewarding path through China's banking sector remains unclear. Some analysts are also concerned about CITIC Pacific's ability to manage a diversified conglomerate that would include financial services alongside its current steel and property businesses.

The deal centers on the acquisition of CITIC Ltd, the chief operating arm of CITIC Group. CITIC Ltd's businesses range from real estate and natural resources to engineering. But it derives its income mainly from financial services, which accounted for 87.3 percent of pre-tax profit in 2013.

Driving the bulk of the segment's earnings is China CITIC Bank Corp. While CITIC Bank is profitable, like other Chinese lenders, it is exposed to a rising tide of souring loans as the economy slows.

"Investors may take a cautious note on their increased exposure to China's banking sector amid prevailing concerns about the slowing Chinese economy and potential increase in bad debts," said Ben Kwong, KGI Asia's head of research. "This will be a real challenge for CITIC Pacific, and only time will tell whether they could navigate out of this situation successfully."

CITIC Ltd, as a whole, has also expanded into riskier, higher-yielding areas including wealth management. Its so-called "maximum loss exposure" to higher-yielding investments jumped 36 times to 322 billion yuan ($51.5 billion) at the end of 2013 from 8.97 billion in 2011, according to a disclosure by CITIC Pacific to its shareholders in April.

Chinese banks, one of the conduits of such products, earn fees by offering retail investors high-yielding investment products often backed by loans to borrowers that are struggling to access normal lending channels.