Hong Kong banks told to improve their game when it comes to competing for China business

PUBLISHED : Tuesday, 20 September, 2016, 7:28pm
UPDATED : Tuesday, 20 September, 2016, 7:28pm

Hong Kong’s banks have been told to up their game when it comes to conducting China-related business as the industry undergoes a painful contraction driven by the mainland’s economic slowdown.

The calls come as leaders of Hong Kong’s banking industry have increasingly begun to realize that some of the city’s advantages as an international yuan hub are no longer valid amid an unprecedented year of flattening profits.

Ba Shusong, a former deputy director-general of the State Council Development Research Centre who currently serves as chief China economist at Hong Kong Exchanges & Clearing, criticised the city’s banking industry as lacking the ability to capture China-related opportunities.

He said local banks may be letting business opportunities slip away while they struggle with internal mechanisms to coordinate business – a charge he directed at both the subsidiaries of mainland banks and international players alike.

Products here are also largely monotone. I feel we must go and locate new advantages
Ba Shusong, China economist for HKEX

Ba’s criticisms were underpinned by a widespread belief among banking leaders attending Tuesday’s Hong Kong Institute of Bankers’ annual conference that the city’s core competences in capturing yuan-related business are fading away. These lost competencies include Hong Kong’s early starter advantage in developing the yuan business, its large market share in consolidating offshore yuan liquidity and dim sum issuances, and the diversity in yuan-denominated products offered.

While these early advantages had meant a hot growth business as recently as 2014, Ba said it was now obsolete.

“Now that we have the Cross-Border Interbank Payment System (CIPS), all banks transacting through the platform operate on the same playing field. Previously, boasting [about] operating an offshore clearing bank was a policy advantage. This is no longer the case,” he said.

With the offshore yuan pool having contracted since last August, Ba noted Hong Kong also could not expect to win on scale, as yuan deposits in Hong Kong had fallen to around 600 billion yuan from a peak of 1 trillion yuan in 2014, according to Hong Kong Monetary Authority statistics.

“Volatility in Hong Kong’s [interbank offered rate] for yuan is now high and frequent. Just now we were checking the rates over the break. It’s again at a new high… Products here are also largely monotone. I feel we must go and locate new advantages. Hong Kong’s financial industry must undergo significant change,” Ba said.

He said criticisms from mainland corporates that they are being underserved in Hong Kong are so frequent that the companies now prefer to address the banks’ headquarters directly when seeking to improve service.

Ba’s criticisms aired at the banking conference were echoed by others in the industry.

Zhu Qi, chief executive of Wing Lung Bank, a subsidiary of China Merchants Bank, said the challenges this year were indeed unprecedented, even when compared with the 2008 Asian Financial Crisis and 2003 Sars outbreak in Hong Kong.

“Operating conditions are difficult. 80 per cent of the industry peers’ have seen their profit level coming down,” he said. “Hong Kong has not been not immune to China’s slowdown. The slowdown has opened up new asset quality challenges. Even new innovative businesses are now subject to regulatory pressures. RMB is still a core development, but the opportunities are subject to uncertainty,” Zhu added.

Bank of China (Hong Kong) chief economist E Zhihuansaid that after the August 11, 2015 depreciation of the yuan, people’s confidence in holding yuan was shaken. “Market volatility is clearly up. The simple business model of giving access to China’s domestic markets, such as the interbank bond market, is no longer valid,” she said. “[BOCHK] was the earliest to develop yuan businesses, but policy advantage does not guarantee you can go far.”

Nonetheless, despite the loss of Hong Kong’s early starter advantage, Zhu offered hope that there could be opportunities for the city’s banking industry - but only if it could address the issue of an acute shortage of talent qualfied for doing China business.

“Because of yuan volatility, a lot of clients have seen massive losses and have come to realise the need to manage their exposure. This has opened up opportunities for risk management. I’m hopeful the yuan business could still grow,” Zhu said. “Ninety per cent of our clients here are doing China business one way or another. This is a market structure that no other international financial centre can compete with.”