Foreign banks see a pot of gold in the nation's dazzling growth, with abundant opportunities to tap the huge number of "unbanked" Chinese.
Under WTO commitments, China must allow foreign banks into the local currency retail lending market of 1.3 billion consumers by the end of 2006. The Chinese Government is fully supportive of foreign financial institutions playing a bigger role in the banking sector, as it sees foreign participation in local banks and bank restructuring as a win-win option.
Along with domestic banks, foreign and joint venture banks have received licenses and foreign investment in foreign currency was permitted nationwide upon WTO entry. Close ties with local banks will help foreign banks to expand their customer bases quickly and establish niche positions in some market segments such as wealth management, retail, credit card, Internet banking and derivative transactions.
China, in turn, hopes that the foreign presence will help transfer expertise and improve the corporate governance of Chinese banks.
Turning up the heat
In China, a major overhaul of the once ailing banking system has turned up the heat on its banks. Ahead of the full opening of China's financial industry by the end of 2006, the government has been actively encouraging investment from overseas and the listing of the big four state-owned banks-Bank of China (BOC), Industrial and Commercial Bank of China (ICBC), China Construction Bank (CCB) and Agricultural Bank of China (ABC)-on the stock market.
In 2005, bullish Chinese banks attracted about $15 billion in investment from banks overseas, particularly the big players such as Bank of America, HSBC Holdings, Citigroup and Royal Bank of Scotland, which made multi-billion dollar commitments as they jostled for global dominance. According to the China Banking Regulatory Commission (CBRC), as of the end of September 2005, 69 banks from 20 countries or regions had established 232 operational entities in China and the assets of foreign banks totaled 660.7 billion yuan. HSBC has invested more than $5 billion in China and that long-term commitment is already paying off. In 2005, ties with local banks accounted for more than 70 percent of HSBC's China pre-tax profit. Recently, other foreign banks such as JPMorgan Chase, Barclays Plc and American Express have begun to tap into the market.
A mammoth sector
On the back of rapid economic growth, the Chinese banking sector has stayed broadly sound and healthy, although challenges remain.
CBRC figures show that total assets of banking institutions in China surged in the first three quarters of 2006. As of the end of September 2006, domestic assets of banking institutions totaled 42.08 trillion yuan, a growth of 17 percent year on year, and accounted for about 90 percent of total financial assets in China. The total assets of state-owned commercial banks amounted to 21.95 trillion yuan (around 52 percent of banking institutions' total assets), up 14.6 percent year on year. Assets of joint stock commercial banks totaled 6.64 trillion yuan, up 20.9 percent; those of city commercial banks were 2.42 trillion yuan, an increase of 28.5 percent; and those of other banking institutions were 11.08 trillion yuan, up 17.4 percent. CBRC reported that there were more than 30,000 institutions in the country's banking industry.
According to the CBRC, non-performing loan (NPL) volumes and ratios for commercial banks continued to decline this year. At the end of the first three quarters of 2006, the outstanding balance of the NPLs fell to 1.27 trillion yuan. The ratio of NPLs declined to