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Asia-PacificMay 2 2004

Foreign bank integration accelerates in China

Louise do Rosario says the pace of change has speeded up dramatically since China signed up for WTO status.For many years, foreign banks in China grew at a snail’s pace, while the local economy was growing an impressive 8%-9% a year. Foreign banks made a negligible impact on the local banking scene, as they were confined by law to a few cities and to serve mainly foreigners.This situation has changed, thanks to the financial liberalisation China has made in accordance with its commitments to the World Trade Organization (WTO).
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As the regulators remove the barriers blocking foreign entry in one sector after another, foreign banks are finally able to assert their presence, attract more customers and become more confident about the market.

Restrictions eased

Since 2002, China has eased geographical restrictions and allowed foreign banks to extend services to mainland firms. It continues to ban them from providing local currency services to Chinese individuals, but foreign exchange services are allowed.

Foreign banks have to wait, under the WTO schedule, until 2007 before they can operate as freely as domestic banks, but they have already benefited from the partially liberalised market.

HSBC, the most active foreign bank in the China market, has just reported a year-on-year 108% increase in net profit of Rmb324.7m ($39.2m) on assets of Rmb32.2bn for the year 2003.

“We are very, very satisfied with our results,” says Dicky Yip, chief executive of HSBC in China. “China will be one of HSBC’s three major markets in the next 10 years. Our priority is to keep expanding our banking franchise here,” he adds. Citibank, a close rival of HSBC in China, says its China operations are also profitable.

In an interview with The Banker, Richard Stanley, Citibank’s Country Officer in China, says: “We plan to develop several business fields in China. These include consumer banking, corporate and investment banking and insurance. We will continue to build a robust franchise throughout China.

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Richard Stanley: in China, Citibank is developing business areas such as consumer banking, corporate and investment banking and insurance

“On the consumer side, we hope to open more outlets in Beijing, Shanghai and Guangzhou to provide customers with flexible and convenient banking. On the corporate side, we will be offering more products in cash management, trade financing and treasury services.” Citibank now has 1000 staff employees in China, up from 150four years ago.

Martin Fish, head of Standard Chartered Bank in China, is also upbeat about the market. “The arrival of foreign banks in China has brought new products and new concepts, and stimulated the market place,” he told The Banker. His bank plans to open more outlets and double its China staff from the current 450 by the year 2007.

Prompt approval

Optimism about the China market was caused in part by the China Banking Regulatory Commission (CBRC)’s recent prompt approval to foreign banks to open new branches and conduct new businesses. In the month of February this year alone, the regulator gave the green light to four banks – HSBC, Citibank, Bank of East Asia and Mizuho Bank – to offer renminbi services to domestic enterprises in 13 designated cities. This opens up a vast frontier of business, for which foreign banks have been waiting for years.

Licences for other services, such as derivative trading and custodian services, have also been granted so promptly that foreign banks are making announcements about these new services almost every week.

The CBRC says it will approve more applications from foreign banks soon. The latest figures show that foreign banks have 151 branches and 211 representative offices in China. At end 2003, they had total assets of Rmb396.9bn, up 21.5% from one year ago.

Rapid expansion

Foreign banks have been expanding so rapidly that the CBRC wants more information and closer supervision of them. From April this year, foreign banks have to submit to it consolidated reports of their Chinese branches – not once but twice a year. The CBRC also demands more information on their lending activities, affiliated transactions, cross-border fund flows, bad loan provisions and capital adequacy ratios.

The biggest business for foreign banks remains foreign-exchange transactions. By end-October 2003, foreign banks accounted for 13% of total foreign-currency loans in China, even though these banks hold a mere 1.4% of total bank assets.

Renminbi business, though, is likely to catch up now that foreign banks have just been given the licence to do so with domestic corporate customers. In Shanghai, half of the pre-tax profits of foreign banks came from local-currency business in 2003, up from 16% in 2001.

“We are currently dealing with the top state enterprises, but will gradually extend to more Chinese companies, now that we have our renminbi-lending capabilities. Local companies come to our bank because they see the benefits of speed, services and solution-finding,” says Mr Fish of Standard Chartered.

His bank has its eyes on small and medium-sized enterprises in China, “a sector which is generally under-served and in which we have much experience,” he says.

Mr Stanley of Citibank adds: “Many large Chinese companies have gone overseas, to countries where their local banks do not have a network. We are helping them to meet their business objective of globalisation. We are complementing the local banks.”

Virgin territory

Another virgin territory for foreign banks is consumer banking. The CSBC granted to Citibank in March 2002 the licence to do foreign-exchange business with Chinese individuals, the first such approval to a foreign bank. HSBC, Standard Chartered, Hang Seng, Bank of East Asia and other banks got the same clearance soon afterwards.

Since then, foreign banks have been rolling out services aimed at mainland Chinese at a dazzling speed.

They introduced internet banking, phone banking, wealth management services and foreign-exchange products that offer flexible interest rates linked to different foreign currencies. Chinese banks quickly copy these ideas in a bid to keep their customers from defecting.

One area where competition will intensify soon is credit cards, a profitable but underdeveloped part of consumer banking. China now has about one million credit cards, even though there are an estimated 540 million charge cards that debit spending directly from the bank account of the user.

Credit cards are rare because the country does not have a nationwide credit rating agency and other supporting infrastructure to control credit risk.

The government has promised to come up with regulations to facilitate foreign participation in this market, but a few foreign banks have decided to make a jump start. In spring this year, HSBC and Citibank each started to issue credit cards jointly with their Chinese partners.

In January, HSBC launched with the Bank of Shanghai a US-dollar Visa credit card that enables Chinese customers to make purchases worldwide, but not in China. Settlement will be in renminbi.

A month later, Citibank initiated – together with the Shanghai Pudong Development Bank – a more ambitious venture: a dual-currency renminbi and US dollar-Visa card, for use in China as well as overseas. Citibank aims to have 100,000 of these cards in circulation by the end of this year.

In both instances, the Chinese side will be the issuer. Mr Yip of HSBC says: “We offer our technical expertise and the Bank of Shanghai handles branding and publicity. It is a win-win situation.”

Chinese banks, in response to the foreign challenge, are also issuing similar cards. On March 30 this year, the Industrial and Commercial Bank of China, China’s largest bank, announced a venture with American Express to issue dual-currency credit cards in renminbi and dollars.

Holding off

Standard Chartered, a leading credit-card issuer in India – another emerging market, has not joined in the race yet. “Co-branding is not something we can do at this point. As far as issuing credit cards is concerned, we will be there. The question is when will we do it,” says Mr Fish.

Credit risk is one concern. “We are increasingly convinced that credit bureaux are an essential part of the infrastructure for unsecured consumer products and for the corporate sector as well,” he adds.

Shanghai is home to China’s first credit agency, Shanghai Credit Information Services Co Ltd, which has started to collect credit data on its residents. By end-2004, it will have a database of 3.7 million of the city’s 18 million people.

Great prospects

Mr Stanley of Citibank sees great prospects in credit cards and other forms of consumer banking in China. “China’s banking system is at a transitional stage, where consumer banking is still relatively small. We are in the middle of a transformation where increasing focus will be placed on the consumer.

“In fact, consumer-driven growth as opposed to growth spurred by fiscal stimulus and investment is one of the most compelling trends in China. The credit card is one important product that supports the development of consumer demand. We see that as developing very soundly in the next couple of years.”

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