Eight foreign banks have attained the holy grail ? a licence to conduct local currency business ? but, like many other goals achieved in China, the prize looks rather less impressive in the hand.
So far, the banks have received only preliminary guidelines on their new licences. But even these show that the long-awaited concession is limited: banks say they have little scope to extend their customer base, while the restrictions on branch networks will make it tough to secure sufficient yuan deposits to build up a reasonable loan book.
"The yuan business scope is restricted," says Mr Bell Chong, manager of Citibank's Shanghai branch. "We have only got five items we can deal in: loans and deposits, 'securities settlement and clearing, and guaranteed investment."
Despite the limitations, the banks are not complaining. Instead, they are ploughing in more investment, both in training and new premises, and are adamant that while today's benefits may be minimal, the longer-term positioning afforded by an early start will beneficial when, finally, the rewards flow through. Citibank, which hopes to offer local currency services in April, expects business to be "relatively modest" this year. However, Mr John Beeman, the bank's corporate officer for China, said, "I would expect it to be profitable in terms of operating income almost from the beginning."
So far, licences have been awarded to eight banks operating in Shanghai. The first batch, issued in December, comprised Citibank, Hong Kong and Shanghai Banking Corporation, the Bank of Tokyo-Mitsubishi and Industrial Bank of Japan.
Four more were added in the following. month: Standard Chartered of the UK, Sanwa Bank and Dai-ichi Kangyo Bank, both of Japan, and the Shanghai-Paris International Bank, a joint venture between France's Banque National de Paris and the Industrial and Commercial Bank of China.
A ninth licence is expected to follow shortly, Banque Indosuez of France has been named as the likely beneficiary. However, the sheer number of licences granted at one fell swoop to chase the same business has caused some consternation.
As with many licences and contracts bequeathed by China, the choice of licensees is seen to carry a political slant, whereby both loyalty and a generous national investment policy appear to have paid off. This is said to be behind the selection of four Japanese banks: Japan has a healthy foreign investment tally in China, and export-credit agency loans are seldom withheld on non-commercial grounds as has been the case, for example, over US loans to the Three Gorges dam project.
But, privately, Japanese bankers suggest another reason ? that their immediate impact in the mainland may be modest given tighter credit lines there.
Weakness on deposits
All eight banks have so far only been issued with very cursory guidelines, which do not even give sufficient substance for planning purposes. Fuller details of the criteria are due to be released by the People's Bank of China (PBOC) later this month.
But what even the brief regulations make clear is that foreign banks will still be limited to the same customers ? essentially, foreign-invested enterprises and foreign nationals ? as they are now dealing with on foreign exchange.
Further ringfencing their capabilities, restrictions on liabilities in Chinese currency are being set at 35 per cent; the remaining 65 per cent of deposits must be in foreign currency. This, coupled with a stipulated one-off capital injection to show commitment, could cap loan books at around US$80m, analysts estimate.
The problems of funding which stem from a limit on deposits ? not to mention a tiny branch network and restricted customer base ? are compounded by existing rules which currently apply to domestic banks.
The domestic banks, whose coffers have grown fat on China's healthy savings ratio, are limited to funding just eight per cent of a loan from the interbank markets. For foreign banks accustomed to regular recourse to the interbank market, either directly or via certificate of deposit issues taken up by other banks the limit could pose an obstacle to lending.
Virtually all the foreign banks admit to weakness when it comes to taking deposits. HSBC, for example, one of the first batch to receive a licence and a veteran on the mainland banking scene, acknowledges this when it talks about using quality service to give it a competitive edge.
"We are weak on deposit business," says Mr Jethro Lau, manager of the bank's Shanghai branch. "We don't have a lot of experience with renminbi transactions. In Shanghai we will have two branches, but the local banks are much stronger. These are weaknesses."
Moving to Pudong
Compounding the predicament is the fact that expansion of the branch network is determined.not by spending plans, but again by the PBOC. The central bank, doing its part to shake up the Pudong hinterland and accelerate its metamorphosis into China's financial and commercial capital, has demanded recipients of the yuan licences relocate there. The branches of most foreign banks in Shanghai, such as HSBC, are in Puxi and the requirement to move across the river has stimulated demand for top quality real estate in Pudong. Citibank opened a full branch office in Pudong last month. At some later stage, the authorities have said that both the original Puxi branch and the new branch in Pudong will be accorded full branch status.
There have already been complaints that China's asset rules ? the amount of net assets a bank must hold in the country in order to set up branches ? are excessively onerous. Foreign banks wishing to set up branches must maintain net assets of at least US$20m.
It is a gripe which has been carried to the PBOC at the end of last year by Mr David Li, chairman of Bank of East Asia and of the trade body the Chinese Banking Association. He told PBOC governor Dai Xianglong to consider cutting the asset requirement because "Hong Kong and southeast Asia-registered banks cannot reach this amount".
Bank of East Asia, Hong Kong's third biggest listed bank and an aggressive player in China where it operates six branches and six representative offices, is widely expected to receive a yuan licence later this year.
In pursuit of the yuan
Another problem is that the restricted pool of customers ? namely, foreign companies and joint ventures ? tend to be short of yuan and not in a position to swell banks' coffers.
Exceptions to this rule ? yuan-rich foreigners ? are likely to find themselves hotly pursued by the banks. The most obvious categories are retailers, including the likes of Yaohan and McDonald's, and sellers of consumer products such as Proctor & Gamble. "They will be the major contributors to revenue," says Chong.
Another possible source are the independent power producers, whose outgoings (for example, to import turbine generators) are in hard currency while earnings, from electricity sales, are in yuan.
Individuals, who have helped local banks build up their phenomenal bases, are unlikely to be anything more than small fry to their foreign counterparts. Although the PBOC guidelines generously concede Taiwanese and Hong Kong nationals as foreigners, the pool of foreigners in Shanghai is still far from large. Most of those who do live in the city receive their salaries in foreign currency.
Obstacles not withstanding, building that deposit business must be a keystone for the eight foreign banks' strategy in China. "The focus will be on how to build the deposits," says Chong. "Without deposits, we don't have the funding source to support new lending opportunities."
It is not a problem that has ever foxed the local competition. Deposits in Shanghai over the last five years have grown at an average rate of 38 per cent, while loans have increased by 24 per cent. At the end of 1995, the balance of loans stood at Yn285.6bn (about US$34.4bn), up 27 per cent from the 1990 balance of Yn234.7bn.
The other big headache for the beneficiaries of the new licences is staffing and training. While staff shortages are common across the whole banking fraternity, the new licensees are in a position where the experience is wholly in the state sector.
This calls for a careful spirit of cooperation, rather than aggressive poaching of the sort that may occur in Wall Street or even Hong Kong. Thus, Citibank is availing itself of training from the PBOC and using local banks as both recruitment ground and training centres. When it comes to yuan business, all the training must come from local financial institutions.
"What we are doing now is recruiting staff and providing training," says Chong. "In particular, the PBOC is offering training covering internal accounting, system settlement and clearing for renminbi.
"So far, all the approved foreign banks are taking the same strategy: trying to get people from the local banks or to seek cooperation from a local bank to provide training or to assign people to work in the foreign bank."
But Chong, like his peers, is wary of translating this into a higher cost of staff for the foreign banks. "Of course we have to pay a premium, but on the other hand that does not mean net that we pay more than the local banks, because foreign banks don't have a subsidy for housing ? we just offer a preferential house loan rate."
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