Foreign banks in China: Just a Toehold

["Ulhas Joglekar" <joglekarulhas@xxxxxxxxxxx>]

Far Eastern Economic Review

Issue cover-dated May 23, 2002

BANKING
Just a Toehold
Doors are opening for foreign banks in China. But hold on, here's what has
to happen in banking reforms before things get really serious

By Ben Dolven/SHANGHAI
Issue cover-dated May 23, 2002


FOREIGN BANKS are making a lot of noise in China right now. Beijing started
handing out foreign-currency licences earlier this year, and Citibank and
HSBC now have well-advertised retail operations in Shanghai and Beijing.
HSBC last December bought a stake in Bank of Shanghai, a small municipally
backed bank, and it's talking about taking a stake in Ping An Insurance Co.,
one of China's largest insurers.
There will be more headlines. With financial authorities pressing mid-sized
Chinese banks to boost capital, several have begun approaching foreign
institutions for equity investments. More foreign-exchange licences are on
the way in cities beyond Shanghai and Beijing. From the HSBC logo on the
Shanghai financial district's most exclusive office tower to the bustling
Citibank branch in the historic Peace Hotel, signs of a banking-system
revolution seem to be taking hold.
But the future isn't here just yet. With two years to go before they can do
full renminbi business with Chinese companies and four years before they can
fully reach the consumer market, foreign banks' toeholds are growing. But
they're still toeholds, and for at least another two years overseas
institutions will remain small presences. Unable to raise renminbi cheaply,
they can't truly compete as domestic financing sources for Chinese
companies--even multinationals can go to Chinese banks for cheaper money. In
a market where interest rates are mandated, they're unable to leverage their
efficiency or credit- and risk-management systems. Visit the bank offices of
Shanghai's financial district, and it's clear it's still early days: tiny
Treasury-market teams, small handfuls of traders, institutions waiting for
the key moves needed before this revolution really begins. This won't last
forever, but here are two steps--short of full currency convertibility--that
must happen before foreign banks are big in China:
One, interest-rate deregulation. Right now, Chinese bank-lending rates are
mandated by the People's Bank of China. Efficient banks must lend at the
same rates as inefficient ones. Risk-management systems can't be used to
compete for the good clients. And there's no sign of a timetable for Beijing
loosening its grip.
Two, an interbank market for renminbi. In order to compete for Chinese
clients, and even multinationals doing business in China, foreign banks have
to be able to raise renminbi cheaply. Today, they can't. Unable to take
renminbi deposits, they must use bilateral arrangements with local banks to
get hold of needed currency, an arrangement that makes renminbi more
expensive. Chinese banks "can provide ample local-currency financing that
many multinational corporations doing business in China find very
attractive," says Fred Hu, managing director of Goldman Sachs in Hong Kong.
THE CHALLENGE: A REAL PRESENCE
An interbank market for renminbi may develop organically in two years, when
foreign banks are allowed to do renminbi business with Chinese companies.
But in the meantime, foreign bankers say, the primary opportunities are in
niches like trade financing or the foreign-currency side of syndicated
loans. Which means the big challenge is making market inroads--without
spending too much.
This raises the tricky question of whether they ought to invest in Chinese
institutions. When HSBC bought its 8% stake in Bank of Shanghai, it was the
first overseas commercial bank to make such a move. But Bank of Shanghai is
unusual--it's a young bank that hasn't had much time to rack up bad loans,
it uses international accounting standards, and the International Finance
Corp. already had a stake. The $63 million investment was small for a bank
of HSBC's size. For that, HSBC gets whatever return it can muster, plus the
ability to learn about the Chinese market through a local partner.
Does it get HSBC into the market any deeper? That's not clear. Eddie Wang,
HSBC's country head, emphasizes the investment is a financial one, and says
that while HSBC has started providing technical assistance, it is only just
beginning to discuss the possibilities for co-offering products. Still,
several mid-sized Asian banks say they've been approached for similar moves.
Rumours swirl around Hong Kong's Bank of East Asia taking a stake in
Beijing-based Minsheng Bank or another institution. (Both decline comment.)
Singapore's DBS Bank, its officials say, has also been approached.
"I think there's a lot of time" for equity investments in Chinese banks,
says Samuel Zavatti, the Hong Kong-based global head of financial
institutions at ABN Amro. "As the domestic market opens, that would lead to
opportunities later on. But regional players might need to be in, in order
to get a footprint."


Copyright ©2002 Review Publishing Company Limited, Hong Kong. All rights
reserved. Please direct all queries about the copyright of articles in the
feer.com archive to webmaster@xxxxxxxx