Currently, foreign financial institutions have only a toehold in China. By the end of last year a total of 31 banks with branches in Shanghai and Shenzhen were conducting small volumes of yuan business with foreigninvested enterprises. They bought in local currency at a cost because they were not allowed to take deposits. According to official sources, their combined net profits were just US$134m in the first half of last year.
Accession to the WTO means much improved prospects for foreign banks. HSBC is applying to offer foreign-currency businesses in four cities and Standard Chartered and Citibank are also preparing applications. Perhaps more than any other foreign retail banks, these three have the ambition and resources in the region to compete with the local competition head on.
However, taking market share from domestic banks is unlikely to be straightforward. The experience of many other sectors over the past decade shows how adept the Chinese government is at protecting its stateowned enterprises. Being limited to opening just one new branch a year means that foreign banks will remain dwarfed by the Chinese banks.
Some foreign bankers believe that new barriers will be raised as quickly as the old ones come down. Regulations announced last month stipulating that foreign bank branches conducting foreign currency business must have operating capital of at least Yn600m have done little to quell these fears.
The doors are opened China’s financial institutions will come under enormous pressure as the doors open wider. The major multinational names have considerable expertise in international markets and leverage from substantial global operations. The 160 or so foreign banks in China can be expected to raise their exposure well above almost US$40bn-50bn in assets they already hold there.
Many foreign financial corporations surpass China’s home-grown banks in the provision of fee-based services, where Chinese institutions are particularly weak. Domestic banks are ill-matched in product and service range and sophistication, risk assessment and credit pricing, cash handling, marketing and in a host of other areas. They lack profitability and lag in market segmentation capabilities. Chinese banks remain over-staffed despite recent branch closures. Foreign banks are leaner, with higher management and operating expertise, and they have invested heavily in technology. Their foreign exchange capabilities are global, whereas the major mainland banks, with the exception of Bank of China, are still highly localised within the domestic economy.
As new areas grow, mainland banks will find themselves on a steep learning curve compared with their foreign rivals. Fundamentally they lack experience in making commercial loans, for example to private enterprises or to individuals buying homes and big-ticket items such as cars. These businesses, which are in their infancy in China, offer perhaps the greatest potential to foreign bankers. It is no coincidence that Minsheng Bank, China’s only private bank that lends primarily to the private sector, enjoyed a 60 per cent rise in pre-tax profits last year. A proposed joint venture between China Construction Bank and Germany’s Bausparkasse Schwaebisch Hall, likely to be the first of its kind in China, will be engaged mainly in the mortgage business.