Domestic banking players face mounting challenge
By Chen Yao (Business Weekly)
Updated: 2004-07-30 14:17

Foreign banks, extending their financial arms in China, will speed up their expansion plans to coincide with the gradual lifting of restrictions on their businesses.

China Banking Regulatory Commission (CBRC) last week announced 100, or half of the foreign banks operating in China, are now allowed to provide banking services in renminbi, the nation's currency.

That announcement signalled, again, that China's banking authorities are opening the country's banking sector, as scheduled, in accordance with the World Trade Organization (WTO) agreement China negotiated a few years ago.

China joined the world trade bloc at the end of 2001.

But experts warn competition among the foreign banks and competition between foreign banks and Chinese banks will intensify, even though China's banking sector is large enough for everybody.

Foreign banks will soon have more opportunities to develop customers, their businesses and regional networks in China, CBRC Vice-President Li Wei told a high-profile forum earlier this month.

CBRC has strictly followed China's WTO commitments. The agency has lifted bans on foreign banks' forex businesses. CBRC has also increased the number of cities -- from two to 13 -- in which foreign banks are allowed to start renminbi business.

China's financial authorities have long been reluctant to allow foreign banks to conduct renminbi business out of fear the banks' absorption of deposits and/or issuance of loans in renminbi might threaten Chinese lenders' profitability.

"China's financial authorities' worries are justified ... the country's largest lenders are still mired in mounting bad loans," said Yi Xianrong, a financial expert with the Chinese Academy of Social Sciences.

Chinese banks, unlike their foreign counterparts, have been crippled by non-performing loans. It will take them a few years to re-establish their footing, Yi said.

"Renminbi business has become Chinese lenders' main profit source, and probably their last resort," he said.

Meanwhile, foreign banks have increased their presence in China through many years of hard work at spreading their businesses nationwide and building relationships with Chinese clients.

Foreign banks' renminbi-denominated assets reached 84.4 billion yuan (US$10.2 billion) at the end of June, up 49-per-cent, year-on-year, indicates CBRC's figures.

Their profits from renminbi operations reached 267 million yuan (US$32 million) in the year's first half, CBRC said.

Many industry experts suggest foreign lenders will not pose a great challenge to the Chinese banks' leading position, especially the four largest State-owned banks.

"Chinese banks usually have long-standing relationships with local clients, and even government officials. They have achieved a considerable market share," said Zhong Wei, a researcher with Beijing Normal University's Financial Research Centre.

"That competitive edge cannot be easily displaced by foreign banks, which, as newcomers, may not be familiar with the local business environment."

Chinese banks have vast networks of branches throughout the country that foreign competitors may have a hard time penetrating, he said.

The Industrial and Commercial Bank of China (ICBC) has about 20,000 branches across China, while the Hongkong and Shanghai Banking Corp (HSBC), considered to be a well-established foreign bank, has 11 branches.

Chinese banks have access to low-cost renminbi funding through their vast deposit bases, while foreign banks largely depend on the interbank market for funding.

ICBC, for example, has 100 million individual and 8.1 million corporate customers.

"It is no surprise foreign banks are still playing a much less important role than Chinese lenders in the country's fast-growing banking market," Yi said.

By the end of May, the total assets within China's banking industry reached 29 trillion yuan (US$3.5 trillion). Foreign-funded banks held about 1.5 per cent of those assets, or 410 billion yuan (US$49.5 billion).

Foreign banks' comparatively minor role in China is the result of the restrictive regulatory environment created by the country's financial authorities, experts said.

Foreign banks, which have been authorized to provide renminbi services in geographically restricted areas, are only allowed to offer renminbi services to corporate clients.

For the foreign banks authorized to conduct renminbi business, the ratio of renminbi liabilities to foreign currency liabilities is limited to 50 per cent.

"Chinese banks' widespread networks of branches may not be so advantageous, as advanced technology enables such facilities as ATMs (automated teller machines) and Internet banking," Yi said.

"Such new ways of payment and other financial services will pose a considerable challenge to the establishment of traditional bank branches."

Although Chinese banks currently enjoy low funding costs because of their vast deposit bases, such a competitive edge may be gradually eroded, as more customers are willing to transfer their deposits to foreign banks, which provide better services, Yi said.

Foreign banks have also found a new way to tap the Chinese banking market, by partnering with local lenders, experts said.

"Such co-operation is good for both Chinese and foreign banks," said Tang Shuangning, vice-chairman of the CBRC, during a recent forum in Beijing.

"Clients of Chinese banks can also benefit from such exchanges and co-operation."

Chinese banks' current co-operation with foreign banks only focuses on services such as interbank loans and international settlement of accounts, but market analysts say both sides still have great potential in stock ownership and technology co-operation.

China is gradually opening its banking sector to foreign capital, in accordance with promises made to the WTO.

According to China's WTO entry commitments, foreign banks are allowed to set up joint ventures with Chinese counterparts upon entry, and wholly foreign-owned banks are permitted to conduct renminbi business with Chinese corporate customers after China has been a WTO member for two years.

Foreign banks will enjoy "national treatment," beginning in 2006, and will be free to conduct renminbi business with corporate and private customers without geographical restrictions.

CBRC in April approved four banks -- UK-based HSBC, New York-based Citibank, Hong Kong's Bank of East Asia and Japan's Mizuho Bank -- to offer renminbi services to Chinese enterprises in 13 designated cities, including Shanghai, Shenzhen and Dalian.

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