By last November, banks from twenty nine countries had set up 225 representative offices in fourteen cities across China. In addition 67 foreign funded financial institutions had been approved to operate in thirteen cities. Beijing has now more foreign banks represented within its area than Hong Kong. Why the interest?
Possibly the main reason is the speed with which China is now opening its financial markets to the international community. For example, last month saw the largest number of high-level banking delegations to visit Beijing than ever before, as well as the largest number of approvals for the opening of foreign bank branches. Another reason for this interest could be that it is now widely recognised that the People's Bank of China (the Central bank) is seeking to float the Chinese currency, the renminbi, on international foreign exchange markets and to allow foreign banks access to the domestic money and credit markets. At present foreign banks in China are permitted to deal only in foreign currencies but the People's Bank is expected to relax the rules to allow limited business in renminbi. Several Beijing-based banks expect the relaxation to come within a year amid rumours of the renminbi being made fully convertible.
According to Fraser Earle, Group Representative China for Standard Chartered Bank, the areas of banking that should be open up to foreign banks in China would be the ability to lend local currency to joint ventures fully funded foreign enterprises so as to "level the playing field" with PRC Banks.
Financial reforms in China are presently aimed at integrating the country into the world's financial community and are aimed at allowing foreign banks to enter into new business in more Chinese cities, encouraging Chinese banks to set up their branches abroad, attracting more foreign banks to China and gradually opening the country's insurance market.
According to the China Daily, Vice Governor Chen Yuan of the People's Bank of China, an important part of China's planned financial reform will be the revamping of control over foreign exchange including the cancellation of China's Forex quota-system. Chen also expects that the renminbi will gradually become a freely convertible currency, but with the proviso that the timing of these reforms will depend on the size of the country's trade and foreign exchange reserves.
A State Administration of Exchange Control official told China Daily that the government may phase out foreign exchange certificates in what would mark a significant step toward China's declared goal of establishing a fully convertible currency. The statement, is the clearest indication yet that authorities are preparing to eliminate the foreign exchange certificates, introduced in 1980.
Since the early 1980s, banks like the rest of the foreign business community have been hamstrung by reforms that have only given a tantalising glimpse of the business opportunities in China. Until recently foreign banks were restricted to opening only representative offices, giving them just a presence in China, but curtailing them from conducting any full business services. However, an established representative office helps a foreign bank's application to open a branch.
Once a licence to operate a branch is granted, the branch may then do business throughout China. t is not uncommon for a branch of a foreign bank in Guangzhou, for example, to have clients in northeast, west or central China without representative offices in those areas. However, without a full branch network the scope for domestic business is limited. With a branch network, a foreign bank is able to offer both foreign and domestic entities the financing of medium and large industrial projects nationwide, alone or through syndicates. Another growing business area for the foreign bank branches is through interest rates and currency and/or option swap services.
The central government is presently considering allowing some inland Chinese cities in southwest, northwest and central-south China to open to foreign banks. The cities indicated could now include prosperous Wuhan in Hubei province.
Hongkong Bank's newly-opened Qingdao branch presently offers a full range of credit services in foreign exchange, as well as handling import and export-bill business for customers in Shandong province. The Qingdao office brings the total number of Hongkong Bank branches in China to four, together with those in Shanghai, Shenzhen, and Xiamen. Hongkong Bank also has representative offices in Beijing, Tianjin, Dalian, Guangzhou and Wuhan.
Chase Manhattan has recently applied to open its first branch office in Tianjin in order to offer a full range of banking services from loans and deposits to foreign exchange and letters of credit. This will follow the opening of branches by Standard Chartered and Banque Nationale de Paris in the city.
The opening of the Tianjin branch of Banque Nationale de Paris this month reflects the Bank's desire to extend its network in China. Mr Bernard Digeon, Executive General Manager of the new branch commented; "our approach to the market will be comprehensive in terms of client base and product line. We will be actively involved in local development through short to medium terms loans and documentary credit." The bank is in the process of opening another branch in Guangzhou, and has an established branch in Shenzhen.
France's Societe Generale has recently opened a branch in Guangzhou, becoming the first non-Asian bank to do so; the branch will concentrate on trade financing in Guangdong. The German, Scandinavian and Italian banks are all expected to follow this lead. Two other recent entrants to China include TM International Bank of Thailand in Shantou (Guangdong province) and Japan's Sakura Ban in Shanghai. Two banks from the Netherlands are also expected to open affiliates in China.
The vice-governor of the People's Bank of China singled out Japanese banks among all foreign banks, describing their performance as "outstanding" in China's financial market. The Japanese banks stronghold is financing long term projects.
An important role that foreign banks presently offer investors and businesses is consulting and negotiating services; as well as assistance in identifying business opportunities. Several of the major foreign banks publish practical advice manuals for potential and existing foreign investors. Mortgages can be arranged through foreign banks but only for foreign nationals or joint ventures for residential, commercial and industrial property.
The most often needed banking service by foreign companies in China is trade financing and other short term facilities as well as medium term loans — export credit services according to the Banque Nationale de Paris. However, most foreign banks are also called on for market surveys, trade settlements and tracing payments.
China Economic Review's recent questionnaire reveals that most foreign banks in China have ambitions of opening one to two new branches within the nextyear; and that all respondents are awaiting the change in the two-tiered system of the renminbi to become one convertible currency. Until this is realised foreign banks are restricted to under-writing issues on the securities markets of Shanghai or Shenzhen; conducting foreign exchange transactions, and syndicating loans for large infrastructural or industrial projects.
The increase in foreign investors' interest in China is a boon to the foreign bank branches and representative offices which hope to build up capacity to lend to joint ventures. According to one chief representative of a foreign bank the aim is to provide the whole range of business for their clients including renminbi working capital.
To improve efficiency internationally and domestically, computerisation in banking and financial industries is now enlisted in China's strategic information technology development programme. China is planning to set up a computerised trading and clearing system for stocks and a nationwide clearing network linking banks in major cities with a target of 50 per cent of branches of the People's Bank of China to be computerised by 1995 and 80 per cent by the year 2000.
The big boom in the banking business is yet to come. The convertibility of the renminbi with foreign banks able to accept deposits and lend in local currency will generate a wave of business for foreign banks with a network of branches in China and will improve the services available to foreign investors. *