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Foreign banks share RMB profits
By Chen Yao (Business Weekly)
Updated: 2004-08-01 10:41
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.
Access to funding
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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