Five years after joining the World Trade Organization in December 2001, China has opened up its banking markets to foreign competition in its domestic currency. The long-awaited transition last month marks an important milestone in China’s financial liberalisation, but what is its real significance?
Are foreign banks set to dominate the Chinese market in the way they have done in central Europe? Is the prize of the 1.3 billion-strong Chinese market going to be eaten up by foreign banks that have invested billions in minority stakes in China’s main banks in recent years?
Into perspective
Although China’s explosion on to the world economic stage this decade, its consistent 10%-plus GDP growth, its foreign currency reserves now in excess of $1000bn and its massive economic potential have been and will continue to be a magnet for foreign banks, some facts need to be put into perspective.
Make no mistake, China wants and needs foreign bank expertise, but the newcomers will find it is not possible to make huge inroads into the market, unlike in central Europe where foreigners have quickly gobbled up a 70% market share. At present, despite a lot of hubbub on both sides, foreign banks only account for a 2% overall market share, with larger stakes in specific areas. Foreign banks are growing fast, with earnings rising dramatically from $196m in 2001 to $486m in 2005, and they will compete hard in the coming period, but their task in the domestic currency market is huge.
For a start, the network differential is amazing. The ‘Big Four’ state banks, for example, have 70,000 branches between them while the 70 foreign banks represented have a total of just 238 branches – HSBC, the biggest, has just 26 branches. Although the foreigners will help to sharpen product ranges for all and may double or triple market shares in the near term, they are under no illusion about their comparative size and strength. Their focus will be on niche markets if, like the local banks, they can recruit and train suitable staff.
Entry is not cheap
Also, if foreign banks want to buy in, the price is getting ever steeper. ICBC’s record $21.9bn initial public offering in October has given the bank a market capitalisation in excess of $120bn, putting it among the world’s top 10 banks. But on other measures, China’s banks do not do as well. According to The Banker’s Top 100 Chinese Banks listing, the combined top 100 Tier 1 capital of $128.4bn is only the equivalent of that of Citigroup and Royal Bank of Scotland combined, and aggregate pre-tax profits of $19.3bn are less than Citigroup’s alone, leaving room for improvement. Foreign banks will play a critical role in the development of banking in China as it quickly becomes the world’s biggest economy, but careful attention needs to be paid to the details.
