The development and prospects of foreign banks' businesses in China.
The development and prospects of foreign banks' businesses in China
Background
978 saw the first entrance of a foreign bank, Japan Import and Export Bank which was authorized to set up its representative office in Beijing. Ever since then more and more foreign banks have penetrated in China's market. By the end of 2003, there have been about 192 foreign banks to conduct business in this country, among them, 88 got the authorization of RMB business. On December 11, 2002, China finally got the membership of the WTO after decades' effort, which marked a new era of the country's opening up much wider to the outside world, especially in financial services. Though China's financial market will not open up thoroughly to the outside players very soon according to its WTO Accord, immediately after it was announced that the country had joined the WTO, China's central bank publicized the content and timetable for lifting restrictions on foreign banks in China. Most significantly in the new policy is that foreign banks would be gradually gained national treatment as domestic banks in five years after WTO entry.
Many reviewers state that the wave of foreign banks entering China today must have
vast and profound implications for Chinese financial system. Compared to huge amount of total assets held by domestic banks- which was $1trillion in 2002, foreign banks in China only own a small proportion of it- about 2% in the same year. However, the fact that foreign banks stand out as a fierce competitor to domestic banks and the strong challengers to China's current banking system can not be solely explained by their today's market share, thinking about their short-time presence and the severe market-penetration restrictions in the country, but rather by what they have done and are going to do in China's financial market. Hence, it would be interesting to discuss the development and prospects of foreign banks' business in this country.
. The strategies of foreign banks in China
It is critical to understand the aims and business trends of foreign banks in China to explore firstly their strategies in this country. The following study focusing on foreign banks' strategies in China is based on a week of interviews with over twenty senior managers who are from Shanghai Branch of HSBC or Citibank. The study is also supplemented with these banks internal reports and some public studies.
) The geographic expansion strategy of foreign banks is they firstly set up their branches in coastal cities, then extend to core inland cities gradually. Though business permission was much enlarged after WTO entry, foreign banks do not set up their branch networks everywhere as their China's counterparts which construct their branch networks in every city around the country, but rather they firstly carefully examine the prospect of local economic development and banking resources of an area where they are going to set up a branch. Foreign banks take great importance to analysis of investment-return of setting up a branch, therefore those coastal cities with relatively developed economy, complete infrastructure facilities and law systems become their first option, and are in the spotlight of foreign banks' business expansion strategy.
2) The organizational expansion strategy of foreign banks is not to build a huge physical network by themselves, but rather they focus more on new distribution channel, such as on-line banking, together with merging local premier banks in order to more integrate with local economy and customers. By the end of 2003, top four foreign banks, including HSBC, Citibank, Standard and Chartered Bank, and Eastasia Bank, have set up nearly 10 branches and representative offices in China each. However, they do not have a plan to build a huge physical network. Instead, they each finished setting up their on-line banking system and started to provide internet banking services, which also help them to extend their businesses around the country. On the other hand, some top foreign banks showed strong interests to invest in China's premier domestic banks as strategic investors. By April 2004, there have been eight local banks which received foreign investment, including China Everbright Bank, Shanghai Bank, Shanghai Pudong Development Bank, Nanjing City Commercial Bank, Fujian Industry Bank, etc. Among those, the cases of HSBC and Citibank attract many attentions. In early 2002, HSBC invested $65 million in Shanghai Bank, a Shanghai based commercial city bank, and obtained 8% of the bank's total share. In the end of this year, Citibank also announced it had purchased 5% of Shanghai Pudong Development Bank's equity. The latter is also shanghai based bank, but owns a network around several advanced provinces and cities. Both foreign banks stated they would provide technology and product assistances to their Chinese partners, especially in credit card area. Many reviewers forecast the two global banks will enlarge their shares by further investing and technology cooperation so that they can expand their business quickly by using their partners' branch networks.
3) The business expansion strategy is to make advantages of their strength in intermediary businesses, such as international business settlement, agency and wealth management, then drive the development of traditional commercial banking services, so that they can attract more premier foreign and local customers. Compared with China's banks, foreign banks don't have a branch network around the country, but they have stronger capabilities in products innovation, more professional expertise of international financial market trading and wealth management, etc, also they have a huge branch network around the world. Therefore, foreign banks firstly focus on international business settlement, foreign exchange trading. By providing those extra services that China's banks can not make, foreign banks can attract those premier customers that have oversea businesses and strong need for wealth management, then these customers may transfer their other businesses that are currently based at local banks, including RMB settlement, deposits and loans, etc, to foreign banks.
4) The customer expansion strategy of foreign banks is to approach multinationals, joint ventures, foreign funded enterprises and China's leading domestic firms. Multinationals, joint ventures and foreign funded enterprises are first targets of foreign banks, not only because those firms have good business performance and credit records, but also their mother companies usually have strong link with those foreign banks. Foreign banks are also keen on China's leading firms, including those national teams that have strong oversea businesses, mighty private companies and premier high-tech firms. Obviously, foreign banks would not take risk to expand their business to all ...
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4) The customer expansion strategy of foreign banks is to approach multinationals, joint ventures, foreign funded enterprises and China's leading domestic firms. Multinationals, joint ventures and foreign funded enterprises are first targets of foreign banks, not only because those firms have good business performance and credit records, but also their mother companies usually have strong link with those foreign banks. Foreign banks are also keen on China's leading firms, including those national teams that have strong oversea businesses, mighty private companies and premier high-tech firms. Obviously, foreign banks would not take risk to expand their business to all corporate customers. In a press conference held by Citibank in 2002, Mr. Huang Xiaoguang, the CEO of its Shanghai Branch stated, "we merely focus on three categories of firms, including foreign global giants, China's big global firms and those domestic companies with strong international business, in which we can make full use of our global network advantage. We won't break through this customer territory and to do business with other general firms even after China's financial market is open completely after 2006."
2. Current status of foreign banks' businesses in China
A recent survey conducted by FCSSIC (Financial Center of Social Science Institute of China) showed most of foreign banks had successfully extended their businesses in China, though their performance was very different from one another.
Overall, the following characters can reflect the current status of foreign banks' businesses in China by now:
Firstly, the activity domain of foreign banks mainly concentrated in coastal cities. By the end of 2002, there are about 190 foreign banks have conducted their businesses in China. In particular, about 27 among 54 world top banks that are listed in the US Fortune world 500 have also operated in the country. It is obvious that most foreign banks are still keen on coastal cities, such as Shanghai, Nanjing, Guangzhou, Shenzhen, Tianjin, Dalian, etc, while many inland cities, excluding several top cities, such as Wuhan, Chongqing, Xian, their presence was rarely seen though these cities were on the government's opening outside list as well.
Secondly, the business categories are extending quickly from foreign currency businesses to RMB businesses. In 1982, China government began to permit foreign banks to set up operating offices and conduct foreign currency businesses, their foreign money businesses have developed a lot ever since then. Currently, the main foreign exchange businesses of foreign banks covers financing business, loan and savings, international business settlement, investment, guarantee, business bills and consulting, etc. Then in 2002, some foreign banks were permitted to provide RMB business service to foreign customers in Shanhai, Shenzhen and Gaungzhou, and in fact, they extended this business to many foreign customers very quickly. Their customers were not only from those mentioned cities, but also from their neighbor provinces, such as Zhejiang, Jiangsu, Hunan and Guangxi. This fact witnessed that foreign banks have strong capability to expand their business. In February 2003, several top global giants, such as HSBC and Citibank, announced their grants of RMB businesses for China's domestic firms.
Thirdly, the customers focus of foreign banks is mainly on first class joint ventures, multinationals, and China's big foreign-oriented firms, together with some public companies. Taking several top banks, for example, HSBC is keen on serving BP, Shell, Citibank focuses on GE, IBM, Software and Ford. The global banks are also very interested in such China's big state firms with oversea business, such as CNPC, Sinopech and COSCO.
3. The competitions in top cities of China
According to China's government's commitment, foreign banks are able to provide foreign exchange businesses for both domestic firms and residents early from China's WTO entrance, but the restrictions of areas and customers in RMB businesses will not be canceled until the end of 2006, therefore, the current competitions between China's banks and their global rivals are mainly reflected in foreign exchange businesses, especially concentrating on international business settlement and foreign exchange loan and savings, and the competing level is different in different cities.
) Shanghai
As the most advanced and international city in China, Shanghai sees most presence of foreign banks in this country, and the competition here is also most fierce. By the end 2002, there have been 53 operating foreign banks' branches. 12 among which, including HSBC and Citibank, getting the permission of conducting comprehensive foreign currency businesses in the same year, covering both corporate banking and personal banking, local firms and local residents. A recent statistic provided by Shanghai Branch of People's Bank of China, showed that the growth rate of foreign currency savings of foreign banks had surpassed that of domestic banks in Shanghai in early 2002. Furthermore, some foreign banks in Shanghai have extended their businesses to the nearby provinces, including Zhejiang and Jiangsu, the most powerful economies of China.
In the end of 2003, the total assets of foreign banks in Shanghai were about $27.49 b, increasing by 35.69% compared with a year ago. Total amount of loans were up to $12.1b, growing by 15.16% compared with 2002. Total savings was $7.14b, growing at 56.53%.
In the same year, operating profit before tax of all foreign banks was $107m, in which the contribution of RMB business exceeded 50%, reflecting rapid growth of their RMB business.
With the expansion of business and customers, foreign banks achieved great performance. In 2003, their market share in Shanghai banking sector in terms of total assets, savings and loans was 11.84%, 3.86% and 8.64% respectively, much higher than a year ago.
2) Shenzhen
Shenzhen, as the symbol of China's opening to the outside world, owns the second largest scale of foreign banks in terms of both foreign currency assets and savings.
Ever since the foundation of Shenzhen Branch of Hongkong Southsea Bank, the first foreign bank in the city, the amount of foreign banks has been growing. Up to early 2004, there were 25 foreign banks that have operating branches, together with 7 representative offices. The total staff of foreign banks are about 830, occupying 2.6% of whole staff of Shenzhen banking sector.
It was stated by Shenzhen Bureau of Banking Regulation, in the end of 2003, the total assets of foreign banks in Shenzhen were $7.32b, total savings was $2.33b. Thereinto, the absolute amount of savings enhanced by $0.84b, with a growth rate of 55.99% compared with last year.
3) Tianjin
As a traditional financial center of North China, many eyes of foreign banks have turned to the city for years. By the end of 2002, there were about 14 foreign banks got presence in Tianjin, and 4 of which was authorized to conduct RMB business. Foreign banks firstly extended their international settlement business very quickly. In the end of 2002, market share of big four state banks in total foreign exchange assets was 82%, while foreign banks gained 0ver 10%. In terms of foreign currency loans, big four banks occupied 67%, compared with foreign banks' 33%, which reflects China's domestic banks face heavy stress from foreign banks to compete in foreign exchange businesses.
4) Dalian
Dalian is famous for its beautiful city environment, but it is also an important financial center in North China, which stems from its position as the most important and largest harbour serving so-called Northeast Three Provinces, including Liaoning, Jilin and Heilongjiang. All of them are the most critical bases of China's heavy industries.
Foreign banks based at Dalian are mainly from Japan and South Korea. In 2003, there were already 11 foreign banks in this city, and 4 of them started to conduct RMB business. In the end of 2002, total foreign savings in Dalian was $3.22bn, in which China domestic bank owned $2.92bn, while foreign banks owned $0.29bn, the latter grew by 17% compared with a year ago, which reflects a severe competition in foreign exchange business as well.
5) Xiamen
Xiamen, a Southeast coastal city in Fujian Province, is one of the so-called four Special Economic Districts opening to the outside world early from 1980. The city is an industry base that many Taiwan firms are located, together with some global giants, such as Dell, Ports and Nokia, Kodak, etc. Therefore, it also becomes a hot place that many foreign banks have strong interests. Similar to other coastal cities, foreign banks in Xiamen also start to challenge China's banks in international settlement first, which brings about great pressure especially to Bank of China, the biggest international business-led domestic bank in this city.
In 2003, there were 3 foreign banks starting comprehensive foreign currency business, with their customers covering both China's corporate and personal clients. The past five years saw the average annual growth rate of foreign banks arrived to 35% in foreign exchange savings. By the end of 2002, total amount of international business of foreign banks have exceeded Xiamen Branch of Bank of China.
6) Guangzhou
Guangzhou, as the capital city of Guangdong Province, is a central city where many foreign-invested firm gathered. Around this city, there are Dongguan, Foshan, Nanhai and Shunde, which are called "four small tigers" of Guangdong, famous for their large amount of Foreign-invested firms. With the exaggerating of foreign firms' business, especially after many global giants set up their global product center in this area, the place around Guangzhou is also called "world factory". Hence, Guangzhou is the city that is attracting more and more global banks' eyes.
In 2002, there were about 15 foreign banks conducting business in Guangzhou, most of which got the permission of comprehensive foreign currency business. More importantly, HSBC, one of the largest global financial banks, set up its global data collecting center in this city, reflecting Guangzhou's strategic position in its global network system.
Since 2002, the market share of China's domestic banks began to decrease in the city. Taking Guangzhou Branch of Bank of China, the long-term biggest foreign business domestic bank, its market share in international business came down from 34.74% in 2001 to 32.98% in 2002. On the other hand, market share of all foreign banks increase from 22.32% to 27.86%. It is foreseen that the market share of all foreign banks will surpass Bank of China in 2004.
4. The main foreign players in China
Currently there are four main foreign players in China which have boosted their presence not only by market share, number of branches, but also by their business expansion ambitions in this country. The four players are HSBC, Citibank, Standard Chartered Bank and Eastasia Bank. By the end of 2003, all have set up nearly 10 branches and representative offices in China, with their businesses covering both corporate banking and personal banking, coastal cities and inland cities. Also, they all launched on-line banking services, and have ambitions to expand their businesses to the main advanced cities within China. Among them, HSBC is the typical one that has achieved great success in many aspects.
HSBC, the Hongkong and Shanghai Banking Corporation Limited started to establish its mainland China branch in 1980s. Its network covers nine branches. During 2002, the network's parent company made strategic investments of an eight per cent share in Bank of Shanghai and a 10 per cent share in Ping An Insurance Corporation.
Established both in Hong Kong and Shanghai in 1865, HSBC has had a continuous presence in China for more than 136 years. HSBC moved its China head office from Hong Kong to Shanghai in May 2000.
HSBC has the largest branch network among foreign banks in China, comprising nine branches in Beijing, Dalian, Guangzhou, Qingdao, Shanghai, Shenzhen, Tianjin, Wuhan and Xiamen, a sub-branch in Puxi, Shanghai, and representative offices in Chengdu and Chongqing.
During 2002, all its branches were issued licences by the People's Bank of China (PBOC) enabling them to provide foreign currency services for the first time to mainland Chinese citizens and corporations. To support these licences, additional operating funds of US$102.9 million were injected by the Bank's Head Office.
HSBC now provides foreign currency services to local citizens and corporations at 10 locations in nine major cities and has fully launched its phone banking and internet banking services across the country. The Bank recently obtained a Qualified Foreign Institutional Investor (QFII) licence and can also offer QFII custodian services.
HSBC has become the first foreign bank to offer renminbi (RMB) banking services to domestic corporations in mainland China as it launched this service at its Shanghai branch in Feb.2004.
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Dicky Yip, Chief Executive China Business at The Hongkong and Shanghai Banking Corporation Limited, said: "The new renminbi service marks another important step in China's continued liberalization of its financial markets. With a 139-year presence in mainland China, HSBC has long-established links with many local companies. We are pleased to be the first foreign bank to launch the new service after China opened this business area to foreign banks under the World Trade Organisation (WTO) agreement. We look forward to serving local companies through our international banking expertise and network."
HSBC's Shanghai branch will be able to offer RMB services to domestic China companies from a wide geographic area including the 13 cities (Shanghai, Shenzhen, Dalian, Tianjin, Guangzhou, Zhuhai, Qingdao, Nanjing, Wuhan, Jinan, Fuzhou, Chengdu and Chongqing) that are already open to foreign banks for RMB business, and the provinces of Jiangsu and Zhejiang.
HSBC recently revealed its net profit on all mainland branches in 2003 was RMB320m Yuan, doubled that of last year, its total assets was RMB 32bn Yuan, grew by 35% compared with a year ago, which reflected a fast development of the global bank's Chinese business.
5. Analysis and conclusions
With the development and expansion of business scope and customer categories, the index of foreign banks' business performance is becoming better and better, especially they develop very quickly in foreign currency business and intermediary business. Furthermore, their notions that intermediary services should be paid are broadly copied by China's domestic banks, and recognized by most clients.
From their performance of last five years, we can address the following analysis:
Firstly, foreign banks experienced a period of not being very used to local circumstances, and met great difficulties, especially in 2002, however, they were becoming more integrated into local economy and performing much better in 2003.
It was revealed that the debts market share of all foreign banks was 7.4% in 2002, compared with 15% in 2001, and the assets market share falled down to 1.1% in 2002 from 2001's 2.6%. Additionally, it was disclosed by China's Banking Regulation Committee in 2002 that NPL share of 24 among all foreign banks surpassed 20%, 7 of them was up to 90%. This financial results reflect that foreign banks still have some weaknesses in competition, including they lack RMB capital, high cost in capital raising, high loan concentration on several clients and shortage of local expertise, etc, which results in their credit and liquidity risks and stop them from expanding their businesses farther.
However, foreign banks have strong capability to adapt their strategy and to resolve their business problems. It was revealed foreign banks succeeding in promoting their business performance in 2003 after a downslide in 2002. Actually, their foreign currency debts market share increased to 13%, compared with 7.4% of a year ago.
Secondly, different competitiveness polarized foreign banks' business expansion and performance. The downslide in 2002 mainly stems from some small and medium-sized foreign banks. In the mean time, the top global giants have been maintained a high growth rate of business extension. Some of their coastal branches have stepped into a period of profit gaining. Taking HSBC, in 2002, its net profit grew by 30%, and doubled the amount of a year ago in 2003.
Thirdly, the shortage of RMB capital stops foreign banks from expanding their businesses more quickly. In order to expand their business quickly and approach more local customers, foreign banks have to develop their RMB business. However, according to China's current regulation law for foreign banks, their RMB savings can not surpass 40% of total assets, RMB debts can not exceed 50% of total foreign exchange debts, which means their RMB capital is very limited and have strong barrier to develop further. Taking foreign banks' data in Shanghai in mid 2003, the total RMB loan was 29.33bn Yuan, while RMB savings was only 18.97bn Yuan, loan-savings ratio was 155%, which reflected a big gap between RMB capital resource and assets of foreign banks. Many foreign banks are realizing that the shortage of RMB capital is a main barrier for them to expand business in China, because most of their current and prospective clients have stronger RMB business demands than foreign currency services.
From the basic information and analysis above, we draw some conclusions on foreign banks' prospect in China:
) In terms of RMB business, foreign banks can not expand in loan and savings market very quickly. Mainly because that foreign banks can not attract more RMB deposits according to current policy ristriciton, they have to borrow money from China's domestic banks in order to develop RMB business, however, the cost of borrowing money is much higher than savings, which will greatly narrow foreign banks interest margin. On the other hand, they can not provide long-term RMB loans as the duration of the money they borrow form domestic banks is very short (normally shorter than one year ).
2) Foreign banks will more focus on intermediary business to attract high quality customers. From the history and banking development trend, foreign banks have stronger strength and interests to conduct fee-based businesses. In detail, firstly, they have competitive advantages to launch foreign exchange derivatives due to their strong capital power and professional expertise in international financial market, by which they can provide wealth management services for both corporate and personal clients. Secondly, they will use powerful cash management skills and techniques to help big firms better manage their liquid capital in global domain, and promote these clients' capital-controlling capability and operating efficiency of capital, lower cost of capital, etc. Thirdly, they will invest more to develop on-line banking business, so that they don't need to establish nation-wide network, but rather to provide convenient services for clients with on-line banking.
3) The relationship between foreign banks and China's banks is not only competition, but also cooperation. Foreign banks have evident weakness in nation-wide network, RMB capital settlement system, and local expertise, while they can not overcome the difficulties by themselves very soon. Therefore, foreign banks have to develop cooperation relationship with Chinese banks while they compete against them simultaneously. In actual fact, many foreign banks have signed bilateral cooperation contracts with China's banks in RMB capital settlement business. For example, HSBC and Citibank have developed such kind of cooperation with ICBC and BOC respectively. On the other hand, some foreign banks raised their interests to invest in domestic banks. Besides the previous cases of HSBC's investing in Shanghai Bank and Citibank's investment in Pudong Development Bank, it is broadly revealed that BOC and CCB will both attract foreign strategic investors in the process of their comprehensive reform and listing in global capital markets, the prospective investors include HSBC, Citigroup, Deutsch Bank, Credit Suisse First Boston, etc.
In all, the development of foreign banks did not always go smoothly, some period saw their mistakes in investment, risk management and credit policy-decision. But with their deeper understanding of local markets and strengthening of their capital, foreign banks still have a good prospect to expand their business in China. Some even forecast that their market share will arrive to over 10% in five to six years.