Title: Foreign Banks in China: Current Development, Opportunities and Challenges
1Foreign Banks in China Current Development,
Opportunities and Challenges
Wayne Chou, Managing DirectorRegional Manager -
Greater China Global Financial Institutions
Trade Services Wachovia Bank N.A.
April 24, 2007
2Roadmap
- Chinas Banking Landscape
- China Opens Its Banking Industry per WTO
Benefits - Modes of Access to Chinas Banking Industry
- Foreign Banks in China at a Glance
- Operational Foreign Banks in China Business
Scale Profit - Foreign Investment in Chinese Banks and
Restrictions - Latest Development Local Incorporation
- Scope of Business
- Application for RMB Business
- Opportunities Challenges
- Wachovia in Greater China
3Chinas Banking Landscape
SourceChina Banking Regulatory Commission, as of
Q4 2006
4China Opens Its Banking Industry per WTO
- Dec 2001 Foreign currency business opened fully
to foreign banks. RMB business with
foreign companies opened in Shanghai,
Shenzhen, Tianjin and Dalian - Dec 2002 RMB business with foreign companies
opened in 5 more cities - Dec 2003 RMB business with foreign companies
opened in 4 more cities - RMB business with domestic companies
opened in above 13 cities - Dec 2004 RMB business opened in 5 more cities,
including Beijing - Dec 2005 RMB business opened in 7 more cities
- Nov 2006 Regulations of the PRC on
Administration of Foreign-funded Banks
and Rules for its implementation promulgated - Dec 2006 All geographical and customer
restrictions on RMB business removed All
restrictions on foreign banks in China, except
for Prudential Requirements,
removed.
5Benefits to China
- Weak financial markets limit Chinas growth from
extending inland and its transition from an
export-based economy to a consumption-driven one. - China needs to develop its capital markets to
efficiently price and allocate capital to
maintain economic growth and social stability. - Foreign competition is needed in Chinese
financial services industry to drive its reforms
and self-strengthening. - Chinese banks need foreign strategic investors
expertise in management, product innovation,
corporate governance, risk management and
information technology.
6Modes of Access to Chinas Banking Industry
- Representative Office
- Branch
- Wholly foreign-funded Bank or
Chinese-Foreign Joint Venture Bank - Strategic investor in domestic banks
7Foreign Banks in China at a Glance (As of Dec
2006)
- 312 operating foreign-funded banks (vs. 192 in
Dec 2001) - 14 wholly-foreign funded or joint venture banks
are registered in China with 19 branches or
sub-branches - 74 foreign banks from 22 countries have set up
200 branches and 79 sub-branches - 242 rep offices by 186 foreign banks from 42
countries - 29 foreign investors of US19 billion investment
in 21 domestic banks
SourceChina Banking Regulatory Commission, March
2007
8Operational Foreign Banks in China
SourceChina Banking Regulatory Commission, March
2007
9Business Scale Profit
Business Scale (USD, billion, 12/31/2006)
SourceChina Banking Regulatory Commission, March
2007
Profit 2005 US446 million 2001 US196
million Source Bloomberg Nov 15, 2006
10Foreign Investment in Chinese Banks
The Big 4 State-Owned Commercial Banks
11Foreign Investment in Chinese Banks (contd)
Shareholding Commercial Banks
12Foreign Investment in Chinese Banks (contd)
City Commercial Banks
13Restrictions on Foreign Investment in Chinese
Bank
- Dec 2003
-
- Foreign investors are allowed to aggregately
hold up to 25, and individually up to 20, of a
Chinese domestic commercial bank. - A foreign investor is limited to invest in two
Chinese banks - May 2006
- CBRC was quoted saying the cap would remain in
place at least 2007, arguing it was unrelated to
Chinas WTO commitments
SourceEIU China Country Finance 2006
14Latest Development Local Incorporation
(effective Dec 11, 2006)
In Dec 2006, 9 foreign banks were approved to
prepare for local incorporation
15Scope of Business Wholly Foreign-funded
Chinese-foreign joint venture bank
With approval, it may engage in part or all of
the following foreign exchange and RMB
businesses (1) deposits from the general
public (2) short-term, medium-term and long-term
loans (3) acceptance and discount of negotiable
instruments (4) Purchase and sales of government
bonds and financial bonds as well as foreign
currency securities other than stocks (5) letter
of credit services and guaranty (6) domestic and
foreign settlement (7) Purchase and sales
foreign exchange and agent of such (8) Agent for
insurance companies (9) Inter-bank lending (10)
Bank card business (11) Safe deposit box
services (12) Credit information services and
consultancy services and (13) other businesses
approved With the approval of the Peoples Bank
of China, may engage in foreign exchange
settlement and sale businesses.
SourceRegulations of the Peoples Republic of
China on Administration of Foreign-funded Banks
16Scope of Business Branch of a Foreign Bank
With approval, it may engage in part or all of
the following foreign exchange businesses and RMB
businesses provided to customers other than
Chinese citizens within the territory of
China (1) deposits from the general public (2)
short-term, medium-term and long-term loans (3)
acceptance and discount of negotiable
instruments (4) Purchase and sales of government
bonds and financial bonds as well as foreign
currency securities other than stocks (5) letter
of credit services and guaranty (6) domestic and
foreign settlement (7) Purchase and sales of
foreign exchange and agent of such (8) agent for
insurance companies (9) inter-bank lending (10)
safe deposit box services (11) credit
information services and consultancy services
and (12) other businesses approved May receive
a time deposit of not less than RMB 1 million
yuan each sum from a Chinese citizen within the
territory of China. With the approval of the
Peoples Bank of China, may engage in foreign
exchange settlement and sale businesses.
SourceRegulations of the Peoples Republic of
China on Administration of Foreign-funded Banks
17Application for RMB Business
- The operational foreign-funded bank has to
- Have opened business within PRC for at least 3
years - Have been profitable for 2 consecutive years
- Meet other prudential requirements
- When a foreign bank branch is changed into a
wholly foreign-funded bank solely funded by its
parent bank, the establishment date of the branch
is used in calculation to meet time requirements
mentioned above.
SourceRegulations of the Peoples Republic of
China on Administration of Foreign-funded Banks
18Opportunities
- China emerges as one of the largest consumer
markets in the world 1.3 billion population with
US2 trillion in personal savings (PBOC 2006). - Credit Cards
- Usage on the rise with huge potential of growth
- Steep competition and imitation of product
offerings from local banks who can more easily
cross-sell credit cards squeeze the profit - Foreign banks need to select more lucrative
market for better profit - Massive investment infrastructure means pay-off
only in the long run - Joint venture credit companies are not allowed
but industry is optimistic of lift of the
restriction. -
SourceKPMG HK 2007
19Opportunities
- Mortgages
- Fastest growth and currently largest form of
consumer lending. - Low cost of funds but margin could be lowered
with more competition. - Local banks with close ties with big developers
dominate the market foreign banks so far only
deal with expatriates in China. - Lack of proper credit bureau to determine
individual risks. - Concerns about government regulations on
property sector, registration and approval
processes.
SourceKPMG HK 2007
20Opportunities
- Wealth Management
- Over 320,000 high net worth individuals (HNWI)
with financial assets of US1 MM or more in China
in 2005 (CapGemini 2006 World Wealth Report). - Foreign banks are better positioned with their
experience and expertise but domestic banks have
much better distribution channels. - Chinas capital market is very limited but is
priority of development. - Government is wary of allowing too many
speculative investments to hit the market so the
introduction of new products approved has been
slow. - Chinese customers lack in investment experience.
- Lack of Wealth Managers with sufficient training.
SourceKPMG HK 2007
21Challenges
Cost/Barrier Local incorporation is needed for
full access Higher cost Barrier to smaller
foreign banks who eye on Chinese retail
market Investment Return Time Frame Requires
long term investment that may not produce
short-term return Home country stock market may
not reward in the short run People Rapid
expansion meets the bottleneck of hiring
talents Country Chinas social stability is
among its No. 1 priorities Some concerns over
its economic growth sustainability Legal Laws
and regulations might change. Rule of law needs
improvement
22Wachovia in Greater China
- 1979 Office opened in Hong Kong
- 1989 Office opened in Taipei
- 1991 Branch established in Hong Kong
- 1992 Branch established in Taipei
- 1995 Office opened in Shanghai
- 1997 Office opened in Beijing
- 2001 Office opened in Guangzhou
- 2005 Branch established in Shanghai
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