Biz boom looms for foreign banks?
By Zhu Boru (China Business Weekly)
Updated: 2004-11-29 09:38

Foreign banks may not grab more than 10 per cent of China's banking market in three years after the country fully opens up its renminbi business, said a senior banking official and some experts.

"Foreign banks are expanding ... but they will take less than 10 per cent of the China market in terms of assets ... when we look into the year 2010 and even beyond," Martin Fish, Standard Chartered's chief executive officer of China, said earlier last week during his speech at a forum in Peking University.

The prediction countered previous forecasts by most insiders and analysts.

Fish said foreign banks will still be subject to some restrictions over their business licensing, the cities where they can open the branches and the products they can offer -- even after the five-year transitional period of implementing China's WTO (World Trade Organization) commitment.

China will remove its geographical and client restrictions on foreign banks to conduct renminbi business on December 11, 2006.

The commitment ensures that foreign banks will be given national treatment within two years.

However, some restrictions will remain, and foreign banks will not become national in all sense, Fish said.

There will be fewer but stronger Chinese commercial banks -- especially city commercial banks -- through mergers and acquisitions. Some Chinese banks will become more well-known in the international market, Fish said.

Commenting on Fish's remarks, Long Yongtu, secretary-general of Boao Forum for Asia, said he considered it rational that foreign banks will take less than 10 per cent of China's banking market.

Long explained that although China has promised foreign banks national treatment in two years, "if Chinese banks are not able to offer certain financial products, foreign banks, although treated as 'nationals', will not be allowed to enter these fields."

Yet that is only part of the reasons, since "profitability determines everything", said Long.

Echoing Long's view, Hai Wen, vice-president of China Centre of Economic Research at Peking University, said it takes time for foreign banks to become familiar with local markets, while Chinese banks will learn from their foreign counterparts in services and corporate governance and become competitive, leading to a declining profit margin for foreign banks.

According to Fish, Standard Chartered's experience in other markets -- which have opened their banking sector to foreign investors -- indicate that local players will respond to the competition by enhancing service quality and increasing product variety.

Moreover, even in fully-open markets, foreign banks take no more than 9-10 per cent market share, unless the government allows foreign banks to hold more local bank shares, Fish noted.

China Banking Regulatory Commission last year allowed foreign banks to hold a combined maximum 25-per-cent in local banks, up from the previous 5 per cent. The country has made no commitment to WTO in this regard.

But Fish said he expects higher foreign ownership in China's local banks.

An earlier European Union report on China's banking sector indicates that foreign banks' market share in China has dropped since China's entry into WTO in late 2001, against previous forecasts.

Foreign banks contributed only 1.1 per cent to the total bank assets in China in 2002, compared with 2 per cent in 2001, as they faced increasingly fierce competition from local rivals, said the report.

The figure for 2003 is not available.

"Indeed, many foreign banks do not possess an upper hand in offering low-profit enterprise loans, especially to small- and medium-sized players," said Yi Xianrong, a senior economist with the Financial Research Institute of the Chinese Academy of Social Sciences.

"Neither do they have an advantage in their relations with the government, which is sometimes vital for loan issuing -- often large deals."

Yet some experts consider Fish's outlook of foreign banks in China is a bit over conservative.

"I do not have a specific estimation about their market share, but, definitely, it should be higher," said Peng Longyun, a senior economist with Asian Development Bank in China.

Tan Yaling, a senior researcher at the International Financial Research Institute of Bank of China, said foreign banks would be able to grab a much larger market share than 10 per cent, thanks to their higher efficiency and diversified products, particularly products for individuals.

As credit culture prevails in China, consumer assets, which contribute about 9 per cent to foreign banks' assets in China, will increase fundamentally by 2010, said Fish.

Peng agreed that Chinese banks will lose some of their high-end clients to foreign players.

A considerable portion of well-performing clients of local banks would turn to foreign banks as the market opens further. They include multinationals in China and Chinese companies that want to expand overseas, Peng said.

Close