In the next one to three years, pressure on the retail business of Chinese banks from foreign banks will increase. It is estimated that many high-end customers will open accounts with foreign banks, particularly after the launch of credit card business. Foreign banks will take full advantage of non-interest earning operations. With the progress of financial market reforms, interest rates will become market-oriented. This will seriously impact Chinese banks, taking away the favorable situation under which they can easily profit from the interest differences between savings and loans.

Multi-faceted breakthrough

However, Chinese banks will not be embattled forever. Ba Shusong, Vice Director of the Financial Research Institute under the Development Research Center of the State Council, is optimistic about Chinese banks' ability to compete. Chinese banks are quick learners and some excellent joint stock banks are also very competitive, he said. Meanwhile, Chinese banks are closer to the customer-they have not only more outlets, but also more awareness of the needs and habits of their clients. For example, the Internet banking interface of the Industrial and Commercial Bank of China (ICBC) is very straightforward and convenient.

As foreign banks accelerated their expansion, the China Banking Association asked all Chinese banks to stop charging cardholders cross-bank inquiry fees by April 20-an action regarded as a collective way for Chinese banks to enhance their competitiveness.

In terms of service fees, Chinese banks have also adopted policies favoring VIP clients. For example, for non-local express telegraphic transfers, ICBC charges its ordinary customers a service fee of 0.9 percent of the remittance, and customers with a "Money Managing Golden Account" of above 200,000 yuan are charged a service fee of 0.5 percent of the remittance.

For "Money Managing Golden Account" customers, some services like wealth management agreements, deposit certificates, loss report and remittance for collection in different places are free of charge, and wealth management advisory service fees are charged at half the rate of ordinary customers.

For individual consumers, professional wealth management services provided by banks fall into two categories: renminbi management products and foreign currency management products. Ba said that banks providing more diversified, unique and profitable products will win out.

Ba added that for a period after the approval for foreign banks to run renminbi businesses, it is unlikely that large-scale deposits will be transferred to foreign banks. For one thing, foreign banks own relatively fewer outlets, which limits their business capacities. In light of the costs of wealth management services, foreign banks are more focused on middle and high-end customers.

Also, foreign banks have a minimum deposit threshold before an account can be opened, which does not suit all customers. Chinese banks consolidate their consumer groups by incorporating operations such as paying out salaries on behalf of enterprises, water and electricity bill payment, credit card repayments and mortgages.

Foreign banks have the advantage in attracting high-end customers. To address this, Chinese banks are also actively preparing to take on this area. They are accelerating upgrade and establishment of VIP centers to catch up with foreign banks in terms of both products and services. BOC's first private banking service center on the mainland has opened in Shanghai. "Million-dollar" customers can enjoy "one-on-one" services provided by a personal business assistant and an investment advisor. Customers can make instructions on business management over the phone to their personal assistant.

With regard to wealth management products, Chinese and foreign banks have entered a more tit-for-tat competition.

Zhang Min, Vice General Manager of the Department of Personal Banking of China Construction Bank (CCB), said that the foreign currency management market has matured and all banks are accelerating the process of introducing new products. CCB's foreign currency management business increased more than 50 percent in 2006 over the previous year, and the growth rate is expected to accelerate in 2007.

In March, Bank of Communications introduced the "Glory II" Asian Elite U.S. dollar investment product, and pegged it with five quality overseas funds. The anticipated return rate of this product is 20.5 percent.

By April 12, Shanghai Pudong Development Bank had launched 16 various foreign currency management products in three stages, including fixed-rate callable deposits and floating return-rate products pegged with one-package stocks. All products guarantee the return of principal, and currencies include U.S. dollar, euro and Hong Kong dollar.

Product design in Chinese banks covers a more extensive range, and also involves transactions in an increasing variety of currencies. Against the backdrop of the continuous depreciation of the U.S. dollar, Chinese banks have already extended their pegged foreign currency from the U.S. dollar to the Singaporean dollar and euro, the return rate of which ranges from 3.2 percent to 20.5 percent.

Generally, Chinese banks have launched more products but with relatively lower return rates. Among all foreign banks, ABN AMRO Bank has played the leading role in terms of launching new products and universal product designs as well as final return rates for products.

(Xinhua Finance)