China’s announcement Thursday that foreign banks can soon deal in renminbi retail business has prompted a flurry of international lenders to announce their plans to incorporate in China. [Read full text of the regulation]
The rule, which marks the implementation of one of China’s banking commitments to the World Trade Organization (WTO), allows foreign-funded banks to deal in the renminbi retail business across the country after December 11.
In order to better protect the interests of domestic depositors, the Chinese Government is encouraging foreign banks to incorporate locally when dealing in renminbi retail business.
The release of the rule yesterday was welcomed by foreign banks, with a few immediately announcing they are ready to become among the first to incorporate in China.
According to Xu Feng, the director in charge of overseeing foreign banks for the China Banking Regulatory Commission (CBRC), more than 10 foreign banks are ready to change their branches to local corporations following the issuance of the rules.
Foreign lenders including HSBC, Standard Chartered, Bank of East Asia, and Hang Seng Bank have all expressed their willingness to transfer operating branches into locally registered corporations.
“It is a historic milestone to mark the fifth anniversary of China’s entry into the WTO and its commitment to fully open the financial market,” said Richard Yorke, China CEO of HSBC.
“We believe that local incorporation will enable us to further expand our network and service range, in particular our renminbi financing ability for the benefit of our customers in the China market,” he said.
HSBC, Europe’s largest bank, is aimed to become one of the first to incorporate in China based on its experience in other countries.
Katherine Tsang, CEO of Standard Chartered Bank China also announced the bank had submitted its application to China’s banking regulator for local incorporation yesterday.
Hang Seng Bank said it planned to invest more than HK$1 billion (US$128 million) to expand its mainland network and service capabilities, including increasing its number of outlets to 30 from 15 by the end of 2007.
“The total assets of those banks who are willing to transfer to local corporations are accounting for 60 per cent of the combined assets of foreign lenders in China,” said CBRC’s Xu.
According to Wang Zhaoxing, assistant chairman of the CBRC, in order to lower the time and cost of local incorporation, the government will try to guide foreign banks. The procedure will normally take one to three months, Wang said.
Not an immediate threat
Though foreign banks are likely to siphon off renminbi services from local banks, which have grown by an annual average of 2 trillion yuan (US$246 billion) in recent years, experts say they won’t pose an immediate threat to domestic banks.
Wang Yu, a 40-year-old lawyer who has years of experience overseas, said he does not plan to deposit most of his earnings into foreign banks.
“Currently the service in domestic banks are almost at the same level with those of foreign banks, and I don’t feel there is a need to change my bank,” he said.
He did say he would consider buying a few wealth management products from foreign banks once they start dealing in renminbi.
“Foreign banks are more sophisticated in providing wealth management service,” Wang said.
A recent AC Nielsen survey said Chinese customers are increasingly interested in foreign bank services, especially young people.
But Yi Xianrong, a researcher from the Chinese Academy of Social Sciences, says Chinese banks already have a strong hold on the market. “Local banks have already built a nationwide network across the country, making it hard for foreign banks to compete,” Yi said.
Deng Chun, vice-president of Bank of Communications, said he expects “there will be more co-operation than competition” between foreign and domestic banks.
However, analysts pointed out that foreign banks might encounter conflicts in their business strategies. In recent years, international banks have become strategic investors in Chinese banks. Now, they will be in direct competition with those banks.
HSBC, which holds a 19.9 per cent stake in Bank of Communications (BoCom), helped the Chinese bank establish a credit card centre in October 2004.
Now, as the foreign bank expands its own network in the country, analysts worry HSBC will siphon clients away from the card centre.
“I’m afraid with HSBC’s expanding of its own operating branches in China it is not likely to share its clients with BoCom, especially from the high-end clients,” said She Minhua, a banking analyst at CITIC China Securities.
Shanghai is ‘the first choice’
With yesterday’s announcement, Shanghai is expected to get the largest benefit from foreign banks locally incorporating.
Foreign banks currently concentrate their business in the country’s eastern areas such as Shanghai, Shenzhen, Beijing and Guangzhou.
Statistics from the CBRC shows the number of foreign bank branches and bank corporations in Shanghai totalled 60. The overall number of foreign banks and non-bank financial institutions have reached 103 in the city.
Shanghai has 30 per cent of all foreign banking institutions, which accounts for 55 per cent of its total business revenue.
Now, Citibank, HSBC, Standard Chartered Bank, Bank of East Asia, and Hang Seng Bank all said they were considering setting up headquarters in the country’s largest city.
Some foreign firms have expressed concerns that incorporation in Shanghai may take a long time due to complex legal procedures.
In response, the local government established a special financial office to help foreign banks efficiently incorporate.