Australia and New Zealand Banking Group (ANZ; ANZ.ASX) was a late starter among foreign lenders in China, receiving approval for a Chongqing branch, its fourth nationwide, earlier this year. But the company’s strategy reflects careful geographical and sector targeting. It bought 20% of Bank of Tianjin (BoT) in 2006 and added a 19.9% stake in Shanghai Rural Commercial Bank (SRCB) a year later. In late 2009, ANZ set up a wholly owned rural bank, Chongqing Liangping ANZ Rural Bank. Gilles Planté, CEO for North East Asia, Europe and America, spoke to CHINA ECONOMIC REVIEW about ANZ’s plans for own-brand expansion in China and its local investments:
Q: You already have branches in Beijing, Shanghai and Guangzhou. Why is Chongqing next?
A: Chongqing is a municipality appointed by the central government and we are very mindful of the importance of this kind of support. We are pretty sure Chongqing will develop with greater focus than some other areas of China – economic growth was 15% last year. The way in which Chongqing is specializing – focusing on three or four areas [automotives, industrial equipment, oil and chemicals, and IT] – provides a natural backbone of business. It is also the gateway of western China and this means companies are incentivized to set up shop there.
Q: Have you followed particular customers into the region?
A: Our competitive advantage is to offer not only our China network but also our Asian network and our connections with Australia and New Zealand. When multinationals (MNCs) set up in a certain parts of China or Asia, it is our strategy to follow. A lot of these companies going to Chongqing are already our customers elsewhere.
Q: How will the services offered differ from those offered elsewhere in China?
A: The difference is not so much in the nature of the services – they will be based around trade finance, financing and risk management – as the types of firms. There are about 400,000 small- and medium-sized enterprises (SMEs) in Chongqing and 4,000 of them are of sufficient size. These companies’ requirements are somewhat different from those of companies on the eastern seaboard. In China, SMEs tend to be very specialized along the supply chain. So when you look at a company’s risk exposure, you are looking at risk in the supply chain. Who is the company manufacturing for? Who is it distributing products for? In order to provide proper financial services, you need to understand the whole supply chain. It’s more difficult than banking for a large corporation.
Q: The cross-border renminbi settlement program is becoming a key part of trade finance in China, but Hong Kong has yet to use much of its quota. Why is this?
A: It’s only the start, so I wouldn’t say that because the number is small it hasn’t been a success. If you look at how currencies are internationalized, there are several key factors. One is allowing a currency to be used for a certain amount of trade offshore. Another is making sure the onshore money market operation of the currency is transparent, fair and accessible. Investors need to be confident that the government has set rules and things won’t be run in an arbitrary fashion. If you take the example of Australia, which floated its currency 30 years ago, it was done step by step to gauge reaction and assess the impact on the local economy.
Q: What plans does ANZ have for own-brand expansion in China?
A: We want to open a minimum of 20 outlets in the next two to three years, although this depends on regulatory approval. We are a relatively late entrant so our brand is not so widespread, but we still want to grow here.
Q: Where do your investments in Chinese banks fit into this strategy?
A: In terms of city banks, the maximum permitted foreign ownership is two banks; with each stake no more than 20%. We wanted to have specific exposure to the Bohai region, the Yangtze River Delta and Chongqing, which is why we invested in those three banks. Our Hong Kong operations can service the Pearl River Delta. Our philosophy is one of active participation. We have teams on the ground working inside BoT and SRCB, we share infrastructure, and there are customer referral initiatives on the retail and corporate side. We have two board members in each bank and are very much engaged in strategy setting in consultation with the other shareholders.
Q: So there is unlikely to be much competition between ANZ and the banks in which you are invested?
A: We are very clear – we are not competing with our partners. In the retail and wealth space we are only interested in the top 0.5% of the population; BoT and SRCB are mass-market banks, addressing the whole segmentation. On the corporate side, our focus is foreign or domestic MNCs and some selected state-owned enterprises (SOEs); BoT and SRCB are much more geared to the SME market and general SOEs.
Q: Why did you want to open a rural bank?
A: We own 100% of Chongqing Liangping and it’s not easy to own a whole bank with a national license in China. This may be of value in the future. Also, in New Zealand and Australia, we are a leading player in agribusiness, so we can offer some added value in this area here. It isn’t just about providing services to farmers. Liangping is a county and the typical customer is an individual or company doing business locally, such as supplying machinery or fertilizer. There is also real estate business. It’s all about providing financial services to the locals.
Q: How easy is it to develop a rural banking network?
A: The regulatory regime is quite restrictive. Every municipality and county wants to have some say in the operation of the branch – so there is no pooling of branches. One branch is one bank; if we want to set up branches in other counties we have to apply for separate licenses. This means economies of scale are an issue and it complicates expansion. We look at the different counties and try to identify connections with our existing customers; then we estimate what the break even would be and what is required in terms of human resources.
Q: SRCB came about through the consolidation of rural credit cooperatives. How has its business developed since?
A: The clientele is not rural although I’m sure 20 years ago there was an agricultural community 20 kilometers outside of Puxi. SRCB’s strategy is to become a city bank and it is expanding more and more into the center of Shanghai. They are opening kiosks; they want to become the 7-Eleven of bank branches – open long hours and on weekends, a small footprint but very flexible, and concentrated only on what people want to do in branches 90% of the time. It’s been very successful and we are looking at doing the same in New Zealand.