Challenges & Opportunities Co-Exist
Analysis of the newly issued foreign banks regulation “PRC Foreign Bank Regulation”
Since the first foreign bank representative office was established in Beijing in 1979, China has begun her involvement in world economy in a more extensive way. In fulfilling one of her commitments when joining World Trade Organization (WTO) in 2001, China has issued a landmark ruling allowing foreign banks to offer a full range of services to local customers on 11 November 2006.
Background: A Review of Foreign Banks Developments in China
1. Branches and Representative Office (RO) of Foreign Banks
During the past decade, the number of RO of foreign banks in mainland Chinareached its peak in 1997, which was about 550. Subsequently, the number of RO has decreased and it was kept at around 220 in recent years. The number of branches of foreign banks in mainland China is relatively stable, around 150 over the past 10 years.
2. Geography Segmentation
These branches and RO are normally located at coastal cities and metropolitans. Shanghai, particularly due to its extraordinary characteristics, such as government policy, industrial basis, financial position and infrastructures, becomes the most attractive city for foreign banks. However, it is now a trend for these foreign banks to extend their business away from coastal cities, especially to central and western regions, which are equipped with preferential policies.
3. Operating Strategies
These foreign banks have adopted different strategies in China, which include:
a) Target at multi-functional business, including both wholesale banking and personal banking, such as HSBC, Standard Chartered Bank, etc;
b) Cooperate with foreign investment enterprises, particularly clients of their headquarter, such as Japanese banks; and
c) Specialised in a particular industry.
Latest developments: The Newly Issued Regulation
1. Foreign banks shall operate RMB business in China, without any geography or customer restriction.
a) Registered Capital
For banks wholly owned by foreign entity and those established through joint venture, their minimum registered capital shall be RMB 1 billion or the equivalent exchangeable currencies.
b) Business Scope
Once authorized by China Banking Regulatory Commission (CBRC), foreign banks shall be allowed to take deposits from public, offering short-term, middle-term and long-term loans, both in RMB and foreign currencies. Authorized branches of foreign banks shall operate partial or complete foreign currencies business and certain RMB business.
c) Supervisory Measures
Foreign banks shall be supervised and regulated by CBRC. Based upon its assessment of the operating risks of foreign banks, CBRC could take certain actions, such as suspending part of foreign banks’ services and demanding a replacement of senior management personnel.
Foreign banks that are found not complying with regulations in respect of deposit and borrowing rates could be penalized by China Banking Regulatory Commission.
3. Foreign banks could set up a separate entity, or simply just branches and RO in China depending on their own business needs.
4. Consistent treatments between domestic and foreign banks
Since foreign banks are now operating on the same platform with those domestic banks in terms of business scope and customer base, they are therefore subject to the same regulatory framework.
- Foreign Banks
a) Since they are new participants in RMB services, how to position themselves in market place and be accepted widely by customers is a key to their success in China market.
b) Localisation is another challenge to these foreign banks. China is totally different from any other part of the world. Foreign banks still have a long way to go in getting accustomed to China banking regulation system, legal system and economic environment.
c) The big four state-owned banks are their main rivals. The big four have large network of branches that have given them greater access to consumers across China. For example, the number of branches established by each of the big four domestic banks is ranging from 11,000 to 55,000. Whereas for foreign banks, they are normally operating no more than 30 branches in China (for each foreign bank).
d) Apart from competition from domestic banks, foreign banks are also facing stiff competition among themselves. Foreign banks like HSBC, CITIBANK, and Standard Chartered Bank which have long penetrated into China market are likely to compete against each other for market share in this new RMB business.
- Domestic Banks
a) Facing fierce competition from foreign banks could be the toughest challenge to domestic banks for a long time. The primary reasons are due to shortage of capital and high level of non-performing loan (NPL), which reduces the competitiveness of these domestic banks.
b) The existing segmentation and rigorous regulations in banking industry have boosted specialization of domestic banks, which could hinder their future development. Taking commercial banks for an instance, generally their target market is state-owned enterprises, some of which could be operating unsatisfactorily. Consequently, NPL in those banks increases and resulting in a vicious circle as more loans may be needed by these SOE. On the contrary, foreign banks usually are multi-functional. Their services spread to not only traditional business, but also cover investment and securities business. This reduces their operating risks by not relying on a single segment of the market and increases their overall competitiveness.
c) Human resource issue could be another challenge to domestic banks. Generally foreign banks seem to be able to attract the talents from the banking industry. Accordingly, how to retain talented and experienced personnel in those domestic banks are becoming a critical issue that needs to be resolved.
- Foreign Banks
a) Worldwide reputation, international background, innovation and brand name are foreign banks’ greatest assets. More and more individuals are looking for personalized and customer-friendly services, as well as a broader range of services, which are the strength of foreign banks.
b) The good relationship with multinationals paves their way in China. Based upon their long established partnership, more and more foreign enterprises located in mainland China are anticipated to switch their RMB business to foreign banks.
c) China with her more than 1.3 billion population and continuing economic growth would give foreign banks endless business opportunities.
- Domestic Banks
a) As foreign banks begin to offer RMB services, this could encourage domestic banks to explore new market niche.
b) To attract and maintain royalty customers, domestic banks have to look for ways to improve their productivity, efficiency and competitiveness.
Foreign bank headquarters have shown tremendous interests in China market. As mentioned before, huge consumer market and continuing economic growth encourage more and more foreign banks to set up separate entities, branches or RO in China.
The domestic banks seem to take every opportunity to strengthen themselves in anticipation of a stiff competition ahead, including raising additional capital through initial public offering (IPO) in China and/or abroad.
However, whatever the effects of this new regulation may have over the domestic and foreign banks in China, the consumers are most likely to benefit from additional alternatives and increased competition in the banking industry for RMB business.