The development and prospects of foreign banks’ businesses in China

1978 saw the first entrance of a foreign bank, Japan Import and Export Bank which was authorized to set up its representative office in Beijing. Ever since then more and more foreign banks have penetrated in China’s market. By the end of 2003, there have been about 192 foreign banks to conduct business in this country, among them, 88 got the authorization of RMB business. On December 11, 2002, China finally got the membership of the WTO after decades’ effort, which marked a new era of the country’s opening up much wider to the outside world, especially in financial services.

Though China’s financial market will not open up thoroughly to the outside players very soon according to its WTO Accord, immediately after it was announced that the country had joined the WTO, China’s central bank publicized the content and timetable for lifting restrictions on foreign banks in China. Most significantly in the new policy is that foreign banks would be gradually gained national treatment as domestic banks in five years after WTO entry. Many reviewers state that the wave of foreign banks entering China today must have vast and profound implications for Chinese financial system.

Compared to huge amount of total assets held by domestic banks- which was $1trillion in 2002, foreign banks in China only own a small proportion of it- about 2% in the same year. However, the fact that foreign banks stand out as a fierce competitor to domestic banks and the strong challengers to China’s current banking system can not be solely explained by their today’s market share, thinking about their short-time presence and the severe market-penetration restrictions in the country, but rather by what they have done and are going to do in China’s financial market.

Hence, it would be interesting to discuss the development and prospects of foreign banks’ business in this country. It is critical to understand the aims and business trends of foreign banks in China to explore firstly their strategies in this country. The following study focusing on foreign banks’ strategies in China is based on a week of interviews with over twenty senior managers who are from Shanghai Branch of HSBC or Citibank. The study is also supplemented with these banks internal reports and some public studies.

The geographic expansion strategy of foreign banks is they firstly set up their branches in coastal cities, then extend to core inland cities gradually. Though business permission was much enlarged after WTO entry, foreign banks do not set up their branch networks everywhere as their China’s counterparts which construct their branch networks in every city around the country, but rather they firstly carefully examine the prospect of local economic development and banking resources of an area where they are going to set up a branch.

Foreign banks take great importance to analysis of investment-return of setting up a branch, therefore those coastal cities with relatively developed economy, complete infrastructure facilities and law systems become their first option, and are in the spotlight of foreign banks’ business expansion strategy. The organizational expansion strategy of foreign banks is not to build a huge physical network by themselves, but rather they focus more on new distribution channel, such as on-line banking, together with merging local premier banks in order to more integrate with local economy and customers.

By the end of 2003, top four foreign banks, including HSBC, Citibank, Standard and Chartered Bank, and Eastasia Bank, have set up nearly 10 branches and representative offices in China each. However, they do not have a plan to build a huge physical network. Instead, they each finished setting up their on-line banking system and started to provide internet banking services, which also help them to extend their businesses around the country. On the other hand, some top foreign banks showed strong interests to invest in China’s premier domestic banks as strategic investors.

By April 2004, there have been eight local banks which received foreign investment, including China Everbright Bank, Shanghai Bank, Shanghai Pudong Development Bank, Nanjing City Commercial Bank, Fujian Industry Bank, etc. Among those, the cases of HSBC and Citibank attract many attentions. In early 2002, HSBC invested $65 million in Shanghai Bank, a Shanghai based commercial city bank, and obtained 8% of the bank’s total share. In the end of this year, Citibank also announced it had purchased 5% of Shanghai Pudong Development Bank’s equity.

The latter is also shanghai based bank, but owns a network around several advanced provinces and cities. Both foreign banks stated they would provide technology and product assistances to their Chinese partners, especially in credit card area. Many reviewers forecast the two global banks will enlarge their shares by further investing and technology cooperation so that they can expand their business quickly by using their partners’ branch networks.