The last year has seen major changes in China’s financial sector as foreign banks were granted access to the US$2 trillion household savings market while listings returned to domestic stock exchanges, sending shares soaring.
In one of the most closely guarded areas of the Chinese economy – where foreign activity is practically restricted if not actually so – waves are being made, yet the potential size of the ocean remains unclear. Predicting the long game while consumed by the excitement of the short one is no easy task.
As part of China’s WTO accession criteria, from December 11 foreign banks could fully participate in local currency lending. Prior to this, they had been restricted to foreign currency business and limited commercial lending in renminbi.
Obviously, there are various regulatory hurdles that must be negotiated, the most significant of which is the need for foreign banks to incorporate their business locally. Those that don’t do this will not be able to offer as many services.
In April, HSBC, Citigroup, Standard Chartered and Bank of East Asia unveiled their China subsidiaries and announced aggressive branch expansion and staff recruitment plans.
However, they are working from a very small base. The overseas share of banking sector assets in 2005 was US$105.1 billion out of US$4.9 trillion. The four largest domestic lenders – Industrial and Commercial Bank of China, China Construction Bank, Bank of China and Agricultural Bank of China – accounted for US$2.6 trillion.
Although the foreign banks are targeting only high net worth clients, the wealth management products they want to offer will still first require regulatory approval.
What’s more, domestic banks – the Big Four as well as ambitious smaller-scale lenders – are already chasing these same affluent customers. Reforming (although it remains to be seen how effectively), stock market-listed and often foreign invested, the established Chinese banks will be no walkover.
It’s ironic that banking sector realignment is taking place while account holders are withdrawing funds like never before.
In Shanghai alone, it is believed that US$9.1 billion left savings accounts and was deposited in the stock markets during the first four months of the year. A staggering 8.58 million new trading accounts were opened at brokerages in the first quarter, up from 5.38 million for the whole of 2006.
With bank accounts only offering about 3% in interest, it is unsurprising investors are attracted to a market that has risen 300% in under two years.
Much of this growth has come during a red-hot start to 2007, with the Shanghai Composite Index accelerating from 2,200 points in mid-December to above 4,000 mid-May.
Given that the price-to-earnings ratios of Chinese companies are now reaching 50 times, to an Asian average of 12-14 times, to many it is now a question of if and when the government is going bring in cooling measures.
There is also the issue of financial futures, seen as a vital ingredient of market reform, which are expected to be launched reasonably soon. Investors will be able to sell short and effectively insure themselves against downturns in the market. For China’s stock brokerages, now riding high on huge trade commissions but on the brink of insolvency two years ago when the market was at a six-year low, this represents a road to income stability.
Foreign expertise is also seen as a means of bringing the brokerages up to scratch but, like the banking sector, access is severely limited.
A number of brokerage joint ventures have been permitted but UBS’s bid to become the first foreign player with direct access to an A-share broking license, by taking 20% plus management control of Beijing Securities, hasn’t been smooth. (Goldman Sachs found another path, with a Chinese banker effectively holding a brokerage in trust for Goldman until the regulatory situation eases.)
The message is clear: overseas players wanting a slice of China’s financial sector must be patient.
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