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Earnest & Young held a press conference on January 6， reporting the results of its new research into the future development orientations of foreign banks in China.
The report pointed out that most foreign banks hold optimistic opinions towards their future in China as the financial reform keeps progressing.
The Status Quo
In the second half of 2013， the Chinese government announced a series of economic reforms， including the setup of Shanghai Free Trade Zone， the start of collective offering of the benchmark interest rate for loans， the promotion of market-oriented interest rate and the further internationalization of RMB.
More importantly， the financial reform won the full support from the government and the CPC as reported in the 3rd plenum of 18th CPC Congress of China. “All these measures are good news for foreign banks that are running the business in China. Any measure to build a more open， transparent and de-regulated financial market will be broadly welcomed，” said Geoffrey Choi， partner of audit service at the Finan- cial Department of Earnest & Young Greater China. “However， for foreign banks， how many benefits they can have still depend on the scope， schedule and effect of these changes.”
Presently， foreign banks take less than 2% of the total assets in the Chinese banking market， lower than the figure in 2007. The main reason to the fall is that the domestic banks in China developed fast with the financial reform. But when the figure of proportion is put aside， it is easy to see that the foreign banks are still expanding their business in China. Many respondents interviewed by Earnest & Young believe that the growth of foreign banks’ assets in China will be faster than in any other country in three years. Meanwhile， the growth will cross the boundaries of first-tier cities and move to lesser cities of China， said Brian Metcalfe， the author of the report.
As the RMB market becomes more opened and more international， many foreign banks expect themselves to benefit from the increasingly intensified trade and financing activities. The increase in the two-way capital flow brought by foreign investment into China and China’s outward investment will lead to a dramatic increase in the foreign exchange settlement business. The progress in the internationalization of RMB will have new products come out one by one.
Therefore， many foreign banks stated that they were actively capitalizing on the concept of RMB offshore center. These RMB offshore centers will assist foreign banks in capturing the business opportunities in offshore RMB deposit， settlement and foreign exchange deal in the future. Early in this century， the Chinese government announced the goal of turning Shanghai into an international financial center by 2020. The establishment of Shanghai Free Trade Zone last year is a catalyst for Shanghai to realize the goal on time. It also heightened people’s expectations over the progress. The respondent bankers interviewed by Earnest & Young have a consensus that the Shanghai Free Trade Zone will promote banks to launch new services and help them with faster expansion in China.
Actually， the Shanghai Free Trade Zone reportedly has a great appeal for foreign banks， such as the less regulated environment， the faster approval and the new cross-border financial services. However， Geoffrey Choi added that the Chinese government needs to further clarify the benefits of setting up branches or facilities in the Shanghai Free Trade Zone to foreign banks.
The survey also showed that foreign banks think the market-oriented interest rate to be the key for the successful financial reform of China. Though it would influence the banking profits for a short while， the foreign banks are still confident in their ability of makig use of their excellent risk management skills to turn the market measure into their advantages.
Challenges Ahead
In spite of the optimistic attitudes， foreign banks also see the challenges they have to face in China. The first challenge comes from the regulators； the second one lies in operation and the third one is related to the market.
The complex regulation system of China is still a main field that foreign banks focus on. The numerous regulatory rules and the constant restriction over capital and fluidity form barriers to the foreign banks， resulting in the fact that they could only act as distributors in China. They all want to see big changes to the regulatory rules， such as the limitation of foreign currency-based debt and the loan-to-deposit ratio.
The report also pointed out the problem of foreign banks in China， such as the lack of potent skills and talents. In 2013， the 17 foreign banks in China were in great need of the bankers in client relations at enterprises banking departments， talents of legal compliance and people with risk management skills.
Among the 38 CEOs and senior executives， 33 said that their banks went through the narrowed gap between the deposit and credit interest rate. Since many banks rely on the loans lent to enterprises， their profitability might be affected. To counter the influence， foreign banks turn to the measures of increasing the procedure charges， adjust the loan portfolio and even reevaluate the loans if possible. Foreign banks hope to be able to provide a broader scope of services in China. As reported， foreign banks keep increasing the share of Chinese business in its global structure. Recently， they try to increase their presence in China’s financial market through the investment in trust companies， securities companies and assets management companies.
How to make breakthroughs
As Chinese enterprises expand themselves abroad through mergers， acquisitions and Greenfield investment， foreign banks are looking for the chances to increase their onshore and offshore consultancy services. 30% of them believe that the consultancy services for enterprises will see apparent growth this year.
Foreign banks have cuttingedge operating experiences in the environment with an open interest rate system， such as how to design some innovative products matching the current economic features， how to tell the risks of products and how to manage these risks. If China can promote the market-oriented interest rate， foreign banks may have their own advantages in that field.
Geoffrey said that foreign banks had a vast overseas network， which gave them unparalleled advantages in the business of cross-border RMB deal and building the RMB offshore center. These sectors are going to be their next goal of development， to which they will completely devote to.
Therefore， Earnest & Young concluded that the situation for foreign banks in China would be improved in the next three years as did 25 foreign banks. Seven banks are more optimistic as they believe their business will be“greatly improved”.
The report pointed out that most foreign banks hold optimistic opinions towards their future in China as the financial reform keeps progressing.
The Status Quo
In the second half of 2013， the Chinese government announced a series of economic reforms， including the setup of Shanghai Free Trade Zone， the start of collective offering of the benchmark interest rate for loans， the promotion of market-oriented interest rate and the further internationalization of RMB.
More importantly， the financial reform won the full support from the government and the CPC as reported in the 3rd plenum of 18th CPC Congress of China. “All these measures are good news for foreign banks that are running the business in China. Any measure to build a more open， transparent and de-regulated financial market will be broadly welcomed，” said Geoffrey Choi， partner of audit service at the Finan- cial Department of Earnest & Young Greater China. “However， for foreign banks， how many benefits they can have still depend on the scope， schedule and effect of these changes.”
Presently， foreign banks take less than 2% of the total assets in the Chinese banking market， lower than the figure in 2007. The main reason to the fall is that the domestic banks in China developed fast with the financial reform. But when the figure of proportion is put aside， it is easy to see that the foreign banks are still expanding their business in China. Many respondents interviewed by Earnest & Young believe that the growth of foreign banks’ assets in China will be faster than in any other country in three years. Meanwhile， the growth will cross the boundaries of first-tier cities and move to lesser cities of China， said Brian Metcalfe， the author of the report.
As the RMB market becomes more opened and more international， many foreign banks expect themselves to benefit from the increasingly intensified trade and financing activities. The increase in the two-way capital flow brought by foreign investment into China and China’s outward investment will lead to a dramatic increase in the foreign exchange settlement business. The progress in the internationalization of RMB will have new products come out one by one.
Therefore， many foreign banks stated that they were actively capitalizing on the concept of RMB offshore center. These RMB offshore centers will assist foreign banks in capturing the business opportunities in offshore RMB deposit， settlement and foreign exchange deal in the future. Early in this century， the Chinese government announced the goal of turning Shanghai into an international financial center by 2020. The establishment of Shanghai Free Trade Zone last year is a catalyst for Shanghai to realize the goal on time. It also heightened people’s expectations over the progress. The respondent bankers interviewed by Earnest & Young have a consensus that the Shanghai Free Trade Zone will promote banks to launch new services and help them with faster expansion in China.
Actually， the Shanghai Free Trade Zone reportedly has a great appeal for foreign banks， such as the less regulated environment， the faster approval and the new cross-border financial services. However， Geoffrey Choi added that the Chinese government needs to further clarify the benefits of setting up branches or facilities in the Shanghai Free Trade Zone to foreign banks.
The survey also showed that foreign banks think the market-oriented interest rate to be the key for the successful financial reform of China. Though it would influence the banking profits for a short while， the foreign banks are still confident in their ability of makig use of their excellent risk management skills to turn the market measure into their advantages.
Challenges Ahead
In spite of the optimistic attitudes， foreign banks also see the challenges they have to face in China. The first challenge comes from the regulators； the second one lies in operation and the third one is related to the market.
The complex regulation system of China is still a main field that foreign banks focus on. The numerous regulatory rules and the constant restriction over capital and fluidity form barriers to the foreign banks， resulting in the fact that they could only act as distributors in China. They all want to see big changes to the regulatory rules， such as the limitation of foreign currency-based debt and the loan-to-deposit ratio.
The report also pointed out the problem of foreign banks in China， such as the lack of potent skills and talents. In 2013， the 17 foreign banks in China were in great need of the bankers in client relations at enterprises banking departments， talents of legal compliance and people with risk management skills.
Among the 38 CEOs and senior executives， 33 said that their banks went through the narrowed gap between the deposit and credit interest rate. Since many banks rely on the loans lent to enterprises， their profitability might be affected. To counter the influence， foreign banks turn to the measures of increasing the procedure charges， adjust the loan portfolio and even reevaluate the loans if possible. Foreign banks hope to be able to provide a broader scope of services in China. As reported， foreign banks keep increasing the share of Chinese business in its global structure. Recently， they try to increase their presence in China’s financial market through the investment in trust companies， securities companies and assets management companies.
How to make breakthroughs
As Chinese enterprises expand themselves abroad through mergers， acquisitions and Greenfield investment， foreign banks are looking for the chances to increase their onshore and offshore consultancy services. 30% of them believe that the consultancy services for enterprises will see apparent growth this year.
Foreign banks have cuttingedge operating experiences in the environment with an open interest rate system， such as how to design some innovative products matching the current economic features， how to tell the risks of products and how to manage these risks. If China can promote the market-oriented interest rate， foreign banks may have their own advantages in that field.
Geoffrey said that foreign banks had a vast overseas network， which gave them unparalleled advantages in the business of cross-border RMB deal and building the RMB offshore center. These sectors are going to be their next goal of development， to which they will completely devote to.
Therefore， Earnest & Young concluded that the situation for foreign banks in China would be improved in the next three years as did 25 foreign banks. Seven banks are more optimistic as they believe their business will be“greatly improved”.