China Must Open to Foreign Banks to Cut Risks, AmCham Says
China’s government should open its financial sector to more competition in order to reduce risks to the nation’s banks and improve the allocation of resources, the American Chamber of Commerce in China said in a report.
“Foreign banks continue to play an insignificant role,” the Beijing-based group representing U.S. business said in a report released today. “Robust participation by foreign players in all of China’s financial markets would, over time, reduce the risk burden now fully carried by Chinese institutions.”
Foreign lenders’ market share in China has dropped since the government first opened the industry in December 2006. U.S. and European banks such as Citigroup Inc. (C) and HSBC Holdings Plc (HSBA) want to tap household and corporate savings that reached $10 trillion in January as China overtook Japan to become the world’s second-biggest economy.
The chamber’s report singled out China’s yuan-denominated card-payment system, China UnionPay, as slowing down progress in the country’s financial sector. “China UnionPay continues to enjoy a monopoly in the market and this has slowed the market’s development in nationally prioritized areas such as e- commerce,” the 393-page bilingual report said.
The chamber said China’s secondary bond markets were “moribund” because interest rates are set by the central bank, leading to debt issued “with coupons at negative real interest rates.” The report said China should gradually liberalize rates. “The controlled interest rate regime also distorts underwriting in the primary markets because risk cannot be properly priced,” the report said.
Not Successful
“We have not been very successful in persuading China they should make changes,” Chris Murck, AmCham-China’s president, told reporters in Beijing. “This is a system that not only disadvantages depositors but also distorts capital allocation,” he said of Chinese interest rates.
Foreign banks held 1.85 percent of China’s banking assets by the end of last year, compared with 2.38 percent in 2007. Overseas lenders had opened 360 outlets in China as of December, compared with the 16,000 owned by Industrial & Commercial Bank of China Ltd., the nation’s biggest financial firm.
Under Chinese rules, foreign banks must incorporate their operations locally to tap the mass retail market and offer products such as credit cards. They also need regulatory approvals to open outlets and offer new products.
Intellectual Property
The Amcham report also said China must do more to combat software piracy and other infringements of intellectual property, improve government procurement rules to avoid discriminating against foreign companies and avoid using the anti-monopoly law to benefit domestic companies at the expense of foreign competitors.
“China has been broadening its market entrance based on international standards,” Foreign Ministry Spokesman Hong Lei told reporters today in Beijing in response to the report. “Foreign business will gain an even broader market and even higher profit.”
New York-based Citigroup, London-based HSBC and other foreign banks that have incorporated their Chinese operations in Shanghai are targeting an average 21 percent increase in revenue this year, lower than last year’s 38 percent growth goal, as they expect more measures to cool credit expansion, according to the local regulator.
China’s banking regulator set capital targets for the nation’s five biggest lenders above the minimum 11.5 percent ratio amid concern that credit risks may rise, three people with knowledge of the matter said.
Industrial & Commercial Bank and three rivals were told last month to maintain capital adequacy ratios of at least 11.8 percent in 2011, one of the people said, declining to be identified as the plan isn’t public. Agricultural Bank of China Ltd., the nation’s fourth-biggest, should target 11.7 percent, two of them said.
The move may help China’s policy makers curb loan growth after inflation accelerated and real estate prices rose following a $2.7 trillion two-year credit boom. The central bank this month raised the amount of deposits lenders must set aside to the highest in at least two decades, while the banking regulator ordered a new round of stress tests on property loans.
China’s loan growth averaged 20 percent from 2006 to 2010, according to government data.
--Michael Forsythe in Beijing and Luo Jun in Shanghai. With assistance from Yidi Zhao in Beijing. Editor: Ben Richardson
To contact the reporter on this story: Michael Forsythe in Beijing at mforsythe@bloomberg.net
To contact the editor responsible for this story: Ben Richardson at brichardson8@bloomberg.net
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