China has four state-owned commercial banks, 13 joint stock commercial banks, more than 110 city commercial banks, some 1,000 urban credit cooperatives and a large number of rural credit cooperatives. Among Chinese banks, only 12 have been listed.

Facing competition from locally incorporated foreign banks, Chinese-funded banks urgently need a competitive wake-up call.

“The most direct competition between Chinese and foreign banks is in two fields-wealth management services and recruitment of talent,” said Yin Zhongli, researcher at the Institute of Finance and Banking of the Chinese Academy of Social Sciences.

According to Yin, renminbi wealth management is the main focus of various banks due to high yields in the stock market and from investment funds-two areas which continue to see increasing demand for services.

“Locally incorporated foreign banks will certainly not ignore this circumstance,” said Yin. “Some people may also deem that compared with Chinese banks, foreign banks will not only provide services of higher quality, but also be more capable in wealth management. With this view, many clients seeking wealth management services may shift from Chinese banks to foreign banks.”

To the foreign banks, hiring local talent is significant to their development in China. Stephen Green, Group Chairman of HSBC Holdings, says that localization is key to HSBC’s success and an important part of HSBC’s strategy. HSBC (China) will attempt to recruit local talent and attract local elites into the management level.

In 2007, HSBC (China) is expected to hire about 1,000 new employees, Green told Xinhua News Agency. At present, HSBC has over 3,000 employees in China, 95 percent of whom are locals.

“Like HSBC, many other foreign banks also need local talent,” said Yin.

In his opinion, however, since the foreign banks have yet to establish themselves on China’s mainland, competition between domestic and foreign banks will not be so fierce at the beginning, but may take a few years to unfold.

More Chinese banks choose to cooperate with their foreign counterparts. By means of introducing capital from foreign banks, they can introduce advanced management and business experience to improve their competitiveness. Figures from the CBRC showed that by the end of last year, 29 overseas institutions had invested in 21 Chinese banks to a tune of $19 billion.

In addition, the CBRC encourages equity investment in Chinese banks by qualified foreign financial institutions. It is considering an increase in the proportion of equity held by foreign shareholders in Chinese banks (presently 25 percent).

Guo Tianyong, Director of the Research Center for Chinese Banking Industry in the Central University of Finance and Economics, believes that Chinese banks should seek innovation when faced with an open market.

According to Guo, Chinese banks lag behind foreign banks in terms of innovation and diversified businesses. Foreign banks provide services covering all fields of life, such as wealth management, financial consultation, foreign exchange, tax collection, as well as public services of travel, information, transportation and entertainment via the Internet. Some foreign banks even provide services not traditionally within the financial field, such as consultation advice on inheritance, divorce and immigration issues. By comparison, Chinese banks are just off their training wheels with regard to high-end financial services, and are generally weak in service awareness, facilities and standards.

Foreign banks face hurdles

Although the Chinese Government encourages foreign banks to develop business in China, and some have already done so, they are still confronted with difficulties because of the lack of soft skills: cultural and societal knowledge.

According to He, the largest bottleneck for foreign banks’ development in China is the shortage of outlets. At present, foreign banks are speeding up network building on China’s mainland, but the number of outlets to be established by any bank in the next few years may not exceed 100. This is obviously a disadvantage compared with Chinese banks that have outlets saturating most cities.

“I once received a phone call from Citibank inviting me to open an account, but I refused them,” said Guo Tianyong. “There is no outlet around me and that would be inconvenient.”

The high threshold is another bottleneck. According to HSBC (China)’s renminbi retail business account manager Chen, although there is no limitation on opening an account, 55 yuan of management fees will be collected every month if the average daily balance of the account is less than 100,000 yuan. Citibank will collect 50 yuan in management fees per month if the average daily balance is lower than 80,000 yuan. By comparison, Chinese banks do not collect any account management fees. Foreign banks seem to still pursue a high-end-oriented policy.

“Foreign banks are obviously not localized in this aspect,” He said. “With a high threshold, it will be hard to attract renminbi deposits since the Chinese people are used to zero charges for their deposits. Some Chinese companies may not put their deposits into foreign banks, either.”