European lenders mull next China moves

Shanghai's Pudong area is home to the Shanghai Stock Exchange and boasts a skyline that includes the Oriental Pearl Tower, the Jin Mao Building and the Shanghai World Financial Center. Gao Erqiang / China Daily

Industry experts feel that foreign banks in China can have a competitive edge if they are able to leverage their parent banks' resources and experience.

"Support and commitment from the head office is higher than ever, and while the banks' predictions of growth for 2010 are modest, they are greatly improved from last year," says the PwC report, adding that the participants plan to increase hiring by nearly 48 percent over the next three years.

"RBS is committed to the long-term development of China and we look forward to a close participation in the country's economic program by offering our products/services to big institutional and corporate clients," says Li, pointing out that its growth in China will be dependent on how far and fast China is opening up as well as the availability of talent that will support the rapid growth rate in the banking industry.

Apart from their own efforts to expand market share in China, European lenders are also teaming up with local partners to benefit from the latter's local expertise.

HSBC, for instance, has been investing in the Shanghai-based Bank of Communications (BoCom) since 2004 and now holds a 20 percent stake in China's fourth-biggest bank. The two lenders have also set up a credit card joint venture to tap into China's fledgling but fast-growing credit card market.

Senior executives of HSBC could not be contacted.

RBS, the largest bank in Scotland, received approval from the regulatory authorities to set up a securities joint venture with Guolian Securities, enabling it to underwrite equity and bond offerings in China.

"The significance of this joint venture is that it will cover an important capability and provide RBS with greater and easier access to China's increasingly-expanding securities market, allowing us to underwrite shares and bonds issued domestically," Li says.

"It's a short cut for foreign banks to expand their presence in China," says Zhu Ning, professor of finance at Shanghai Advanced Institute of Finance under Shanghai Jiao Tong University.

However, such cooperation will tend to diminish in the future as it is difficult to effectively manage the relationship, Wood says.

"In the short-term, I will be not surprised if the market share of European banks declines, because China is still growing very rapidly (faster than foreign banks' expansion pace), and many of these banks are still concentrating on resolving their home business," Wood says.

The People's Bank of China, or the central bank, and banking regulator CBRC have been tweaking the regulations and policies, as part of efforts to create a level-playing field for both foreign and local banks.

"Chinese banking regulations appear to be moving toward or being in line with the international best practices. This is likely to result in greater regulatory transparency," KPMG says in its report. The firm, however, warned that the prospects for stricter regulations are higher in the banking sector and this in turn will increase pressure on lenders especially in terms of the cost and time involved for compliance.

"As China continues to open up and de-regulate the banking industry, foreign banks will catch up and it is expected that this will be reflected in the market share trend," Li says. He added that even though the proportion of the China business for RBS is still a "relatively small percentage" given the bank's global profile, "it will increase over time in line with the nation's emerging economic importance".

China's plan to encourage yuan-denominated trade settlement as part of its efforts to internationalize its currency has also opened up a slew of opportunities for foreign banks. The central bank had in June this year expanded the pilot program for trade settlement in yuan to 20 province-level regions.

"We are also seeing a trend toward development of the capital market after the decision to allow yuan trade settlement. I think the opening up of the financial sector will be gradual and happen over time," Hahnel says.