Universal banking on horizon
By Chen Yao (China Business Weekly)
Updated: 2004-08-16 16:50

Although deposit-taking and loan-making remain the primary business functions of Chinese banks, ambitious commercial lenders will soon be encroaching upon the non-banking financial business territories of trust companies and equity funds.

Analysts expect universal banking, in the next few years, will become the new hallmark of China's financial market, but, most likely, at the expense of non-banking financial service providers.

As the China Banking Regulatory Commission (CBRC) prepares to issue, in the near future, regulations allowing the country's commercial lenders to command trust and investment companies, the China Securities Regulatory Commission (CSRC) is calling for a regulation to allow banks to establish equity funds.

CBRC Chairman Liu Mingkang recently hinted financial authorities are "considering, and researching, the possibility of allowing commercial banks to access the fund-management business."

CSRC sources told China Business Weekly the regulation concerning fund-management companies will not prohibit commercial banks from stepping into the fund-management business.

All business entities with experience in "operating securities brokerages, trust companies or other financial firms" will be allowed to "hold ... more than 25 per cent of equity funds' stakes," according to the draft version of CSRC's regulation.

CBRC, meanwhile, will allow Chinese banks -- provided they meet capital adequacy, credibility and profitability -- to make cross-industry investments in trust companies.

Once China's commercial banks receive decision-makers' approval to establish trust companies as their subsidiaries, "the era of universal banking will begin in this country," said Ba Shusong, deputy director of the Finance Research Institute. The institute is affiliated with the State Council's think-tank Development Research Centre.

"Chinese banks will respond to the regulatory-driven integration of investment activities, and even go further to enter new market segments, such as insurance and brokerage," he said.

Universal banking is a long tradition in Europe. US competitors began adopting the system in the late 1990s, led by financial giant Citigroup, economists said.

Although commercial banks' assets are generally more liquid and carry less risks compared with assets held by other financial firms, many international banks nowadays offer a wider variety of services, including savings deposits and trust services, they said.

"China's commercial lenders, on their way to turf wars against foreign banking firms, will have to find new sources of profitability to boost their competitive advantages," Ba said.

"Size is not everything. But the advantages of scale can be transferred to the new scope of businesses, including fund management and trust investment."

The combined assets of all banking institutions in China reached 29.2 trillion yuan (US$3.5 trillion) by the end of May, which accounted for more than 90 per cent of the country's total financial assets, indicated CBRC's latest statistics.

The four largest State-owned banks still dominate China's banking market. They hold a combined 60-per-cent share of the market. But other joint-stock lenders, city commercial banks and foreign commercial banks have experienced rapid growth in recent years.

"China's commercial banks have built much larger branch networks compared with foreign lenders. By using such networks, domestic banks will have good opportunities to sell wealth-management products," said Li Chunxin, head of China Construction Bank's investment fund custodian department.

The Industrial and Commercial Bank of China, the country's largest lender, had established more than 22,000 outlets across China by the end of last year.

Those outlets were responsible for about 400 million personal savings accounts and more than 8 million corporate accounts.

"By offering customers more diversified and specifically designed financial products, including equity funds and trust investments, banks will attract more deposits and generate service fees," Li said.

Analysts expect fund-management firms and trust companies will become increasingly worried they will be driven out of the market.

"Banks have been coveting the fund-issuance market for a long time. These days, they are reluctant to allow fund-management companies to access their sales networks, partly because they are seeing equity funds as their potential competitors," said Yuan Bei, a fund manager with China Hua'an Fund Management Co.

China's commercial banks are still cautious about allowing the issuance of mutual funds through their branches, as the comparatively high returns guaranteed by investment funds might divert a portion of their deposits away, Yuan said.

"The best solution for commercial banks might be to establish fund-management companies and issue funds ... and promote the fund units to their existing customers," she said.

Although China's banks will be allowed to make cross-industry investments, they will be required to enhance their risk-management capabilities and meet the authorities' requirements for non-performing loans (NPLs), economists said.

"Trust businesses are included in the high-risk category, of which China's banks should be extremely cautious," said Yi Xianrong, an economist with the Chinese Academy of Social Sciences.

"Trust companies in China have been involved in various businesses without paying attention to ... risks.

"Their no-holds-barred business models are probably what the country's commercial lenders are craving."

Trust companies boomed in China about 20 years ago, after the country adopted its economic reform and opening policy. However, the absence of relevant legislation and/or guidelines led to numerous problems.

China used to have about 1,000 trust companies, but fewer than 100 remain today. The People's Bank of China, the nation's central bank, in 1999 launched an industry-wide restructuring programme.

Two years ago, some Chinese banks offered designated trust-loan programmes, but abolished the services a few months later after many trust companies cried foul.

The trust firms accused the banks of crossing the line, and of luring their customers away.

Xia Bin, director of the Development and Research Centre's Financial Institution, predicts financial authorities will gradually ease controls so commercial banks can establish their trust and fund-management subsidiaries.

"But as CBRC has implemented strict rules and improved ... standards, the country's commercial banks have become more prudent when expanding their businesses to non-banking areas," he said.

CBRC's proposed regulations will also allow foreign investors, including commercial banks, to buy into Chinese trust companies. Relevant requirements for foreign banks will include a US$1-billion threshold, in terms of total assets, and an 8-per-cent capital adequacy ratio.

By May, 61 foreign financial institutions and enterprise groups, from 19 countries and regions, had established 199 operational units in 21 of China's cities.

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