Opportunities and pitfalls abound for the Western banks rushing to build a presence in the Chinese banking market.
There is no doubt that China’s banking market is huge—so sizeable, in fact, that it is tempting global banks to invest billions in an attempt to grab a slice of what promises to be a lucrative business. But despite recent reforms, the market is still rife with corruption, non-performing loans and poor management. There are very real concerns that, in their haste to establish a foothold in China, international banks might be buying themselves more problems than opportunities.
Banks’ rush to invest is understandable, though, given the scale of the market. Chinese banks manage about $4.7 trillion in assets, according to the China Banking Regulatory Commission (CBRC). Over half of those assets are under the control of China’s four biggest state-owned banks. The third largest, China Construction Bank (CCB), is the only one of these four to list publicly so far, raising $9.2 billion in its
IPO last fall in Hong Kong—the largest IPO worldwide in the past four years. These four banks, with tens of thousands of branches across China, join thousands of other provincial and municipal banks servicing the world’s most populous country and fourth-largest economy.
Their customers, the Chinese people, like to save, with household savings estimated at $1.7 trillion at the end of 2005. The responsibility for investing those savings falls largely on these banks. Historically, they have done a poor job. But the global banks pouring investment into the country are convinced they can change that.
While it is riddled with problems, the sheer size of the Chinese banking market makes it difficult to ignore, and international banks such as Citigroup, Goldman Sachs and HSBC are carefully planning their China strategies. At the end of this year, in line with its commitments to the World Trade Organization, China will completely open its banking sector to foreign banks, allowing them to deal in renminbi-denominated deposits and loans. Most foreign banks, however, are not waiting until then to start making investments. Hoping to get a head start, foreign banks have poured billions of dollars into their Chinese counterparts with hopes of cashing in on the Chinese banks’ existing networks.
The recent wave of foreign investments in Chinese banks demonstrates how far China’s banks have come in a short time. The country’s banking officials, accustomed to China’s centrally planned economy, often traded their banks’ profitability for political positioning and judged success by loan volume rather than returns. Partly as a result of this, loans granted to poorly run state-owned enterprises and politically connected patrons swelled into an unmanageable mess of non-performing loans (NPLs). In response, the central government created in 1999 four asset management companies to take over and auction off these NPLs. Since then, Chinese banks have transferred billions of dollars in NPLs to these companies. In addition to transferring NPLs from banks to asset management companies, the government has also injected billions of dollars directly into its banks, pushing up capital adequacy ratios and improving the banks’ balance sheets.
Big, Beautiful or Both ?