China Banks on a Little Foreign Savvy

Beijing hopes that letting in a few overseas banks now will prepare its own lumbering giants for a full-scale invasion down the road

By Mark Clifford

Plenty of scoffing has been heard about China's unwillingness or inability to live up to its World Trade Organization agreements ever since it entered the global trade body in December. I've been among the doubters. And I still am (see BW Online, 6/5/02, "China's Fading Free-Trade Fervor").

Yet in the financial-services area, some signs of progress are showing. China knows the clock is ticking. Under promises Beijing made as part of joining the WTO, by the end of 2006 foreign banks will have the right to do everything that Chinese banks can do. That has the country's bankers and regulators running scared. They worry that tech- and marketing-savvy behemoths like Citibank, based in New York, and HSBC, based in London, will come in and scoop up their best clients.

For a time, Chinese regulators hoped they could whip their Big Four banks into fighting shape to meet the challenge. The Big Four -- Bank of China, Industrial & Commercial Bank of China, Agricultural Bank of China, and China Construction Bank -- control about two-thirds of the banking system. These lumbering giants each employ hundreds of thousands of people at thousands of branches. Although top management has tried to institute reforms in recent years, change has been fitful at best. That's hardly surprising, given the organizations' massive size.

CHANGE OF POLICY.

  The lack of transparency and the vast power that top executives wield also work against real reform. Most Chinese financial institutions feature an almost complete absence of corporate governance and the checks and balances that come with it.

Case in point: Wang Xuebing, long regarded as a reformer when he headed Bank of China, was arrested earlier in 2002 and is being held incommunicado on charges of gross financial irregularities while he headed the bank. Those alleged transgressions resulted in the bank paying an unprecedented $20 million fine to U.S. and Chinese regulators.

Concluding that reforming the Big Four will take many years, Chinese officials have changed strategy. They're hoping that a dose of foreign investment will inoculate the system against the day when outsiders arrive in force. The policy: invite foreign investors in to take minority stakes, mostly in smaller banks but including asset-management companies and stock brokers. Get the newcomers to transfer knowhow but without giving them too much in the way of profits. Perhaps even experiment with allowing foreign control of a smallish bank.

STRATEGIC OPENING.

  It's an interesting notion and shows some much-needed flexibility on Beijing's part. Foreign banks generally don't like joint ventures because they create lots of headaches without the possibility of huge profits. But the banks are willing to make compromises as the price of entry into China.

Besides the $65 million that banking giant HSBC paid for an 8% stake in Bank of Shanghai, it has also agreed to provide its new partner from 600 to 700 person-months of training a year. That's equivalent to sending 50 staffers for a year. Bank of Shanghai can now choose from among a vast cornucopia of HSBC products, from e-banking to credit cards. HSBC will provide it with the support to sell those services to Bank of Shanghai customers.

HSBC wants to make its partner strong -- but not so strong that HSBC won't be able to compete against it in a few years. Of course, if all goes well, HSBC might find itself both competing against Bank of Shanghai for top customers and using Bank of Shanghai as a way of selling a broad range of HSBC products -- from mutual funds to insurance -- to the customers who hold the bank's 6 million accounts.

"CHINA'S CENTURY"?

  It's all too common to find foreign executives grumbling about China's unwillingness to open markets. So it's refreshing to hear that banks think things are changing, however controlled the opening.

Aman Mehta, the CEO of Hongkong & Shanghai Bank, is decidedly bullish on China, the country where the bank got its start way back in 1865. Mehta figures that growth in many consumer-oriented businesses, such as credit cards, insurance, and finance will be in the range of 30% to 40% annually. Growth could even hit 80% in some areas, he believes, noting that China has only 1 million credit-card accounts. If the figure grew to 100 million, the country would still be "undercarded." Predicts Mehta: "The 21st century will go down as China's century."

And for its own reasons, China has chosen an interesting new experiment in the banking arena. Sure, investors in China will continue to swing between the wild extremes of optimism and pessimism. But it seems that in finance, the WTO agreement is starting to have an effect. That just may be the beginning of some very big changes.

Clifford is Hong Kong bureau chief for BusinessWeek. Follow his China Journal columns every week, only on BW Online

Edited by Beth Belton