China warms to foreign banks
Use the barbarians to fend off the barbarians. That was the strategy China used for centuries to keep foreigners at bay from its closed world. Now, it is embracing foreigners in one of the most important sectors of the economy - banking.
In December, the China Banking Regulatory Commission (CBRC) raised the ceiling for foreign equity in local banks to 25 per cent from 20 per cent. The limit for individual investors was increased to 20 per cent from 15 per cent.
The commission has also repeatedly praised the contribution foreigners have made in the sector and has told two second-tier city commercial banks they must recruit foreign investors before they will be allowed to expand.
Industry analysts expect more concessions to foreign banks later this year, as the CBRC now sees them as catalysts for reform of domestic banks.
'Over the next five years, many Chinese banks will have foreign ownership, a process that will accelerate with listing,' said Lian Ping, deputy director of Bank of Communications development and research department in Shanghai. 'Banks are seen as businesses. The impact of foreign equity is much greater than the proportion of the shareholding, in terms of introducing modern practices.' Bank of Communications has been seeking a foreign partner for two years.
'Over the next five to 10 years, there will be an enormous change in the banking industry. The impact of [World Trade Organisation] membership will be deeper and more profound in this sector than any other,' Mr Lian said.
Most attribute the new enthusiasm for foreign involvement in banking to Liu Mingkang, appointed chairman of CBRC when it was established last April.
A fluent English speaker with international experience and at ease giving speeches abroad, Mr Liu is not your average mainland banker.
He has become a forceful advocate for foreign investment in Chinese banks, and has vigorously defended the merits of the new policy direction. Foreign banks, he said recently, could make 'a significant contribution to the improvement of Chinese financial institutions' equity structures, introduce advanced banking operational and management expertise, and upgrade banking activities in line with international best practices'.
In particular, Mr Liu praised three institutions with foreign equity - Bank of Shanghai, Shanghai Pudong Development Bank and Nanjing Commercial Bank - saying they had improved corporate governance, operational management and internal controls as a result. He said there was no evidence that foreign banks destabilised the market. 'The important question is not who provides banking services, but who can provide them more efficiently,' he said. In the context of China's financial industry, however, such comments were unthinkable even a few years ago.
Since taking power in 1949, the Chinese government has regarded finance as one of the economy's most strategic sectors and the industry was for decades closed to private and foreign participation. Even during the Deng Xiaoping period, stretching from 1978 to 1997, foreign banks were only allowed to operate on the margins.
A report prepared for the European Commission found that the share of total assets of the Chinese banking system held by foreign banks fell to 1.1 per cent in 2002 from 2 per cent in 2001. Their share of foreign currency loans fell from 15 per cent to 7.4 per cent over the same period, and dropped even further last year because of aggressive lending by Chinese banks.
But now a consensus seems to have been reached at the top levels of government that foreign influence is good for the slow-changing world of Chinese banking.
Overhauling China's Big Four state banks will take years and foreigners will have only a marginal role to play. For a foreign bank, taking an equity stake in China Construction Bank or Bank of China as part of their listing would anyway be a political rather than economic decision, and would probably have little impact on operations and management.
But, for China's 11 joint-stock banks and 112 urban commercial banks, foreign bank participation could make a difference.
HSBC spokeswoman Chang Dandan said: 'Since we bought our 8 per cent share of Bank of Shanghai in December 2001, we have had a wide-ranging exchange of banking information.
'We have provided training in risk management, credit policy and sales and marketing. We have taken part in their training exercises. We have one non-executive director [HSBC China operations head Dicky Yip] but are not involved in daily operations.'
Co-operation between HSBC and Bank of Shanghai has so far resulted in last month's issue of a dual-currency credit card. HSBC customers are also able to use foreign exchange deposits to obtain yuan loans from Bank of Shanghai.
'It is a mutual learning exercise. We may be one of the world's biggest banks but are a student when it comes to yuan business. We need to learn and study about the market,' Ms Chang said.
