Future directions for foreign banks in China 2014 - ey.com · Human resource developments 70 ... not tell the whole story. ... shareholding in a mid-sized bank, might attract interest

Future directions for foreign banks in China 2014

01. Foreword: EY’s insights on the report findings 4

02. Findings at a glance 6

03. Overview of the current landscape 14

04. The regulatory framework 36

05. Digital developments 48

06. Performance and growth 52

07. Product and segment developments 62

08. Human resource developments 70

09. Research methodology 76

10. Appendices 78

Contents

4 I Future directions for foreign banks in China 2014

Future directions for foreign banks in China 2014 I 5

01. The world continues to watch China with interest, looking to this important Asia hub as a source of growth and development. For non-Chinese companies, ambition to share in the success of this booming market and tap into the benefits of its vast population and increasing middle class is driving more investments.

While the size of prize is significant, gaining traction is not without its challenges. At the end of 2013, market share of foreign banks in mainland China was just 1.73%, which is not reflective of what foreign banks have committed to the China market.

In this, the second annual EY Future directions for foreign banks in China report, we examine the challenges facing players as they push to improve their footprint in China. We look at the trends and regulatory reform that is shaping the market and offer insights into ways of driving growth – now and in the future.

For example, consumer banking continues to be a challenging space for the foreign banks in two key areas. Firstly, the difficulties of limited physical distribution channels put them at a distinct disadvantage to the local banks. While online and mobile banking offer a way of working around this and attracting the attention of the younger, upwardly mobile financial consumer segment, the prevalence of non-banks, such as Alibaba and WeChat, highlight the second key challenge faced by foreign banks in the retail space. These groups, which typically operate outside of the regulatory net, offer arguably more attractive alternatives to consumers and contribute to the challenge of achieving a profitable retail banking operation. In March 2014, the regulators approved the set-up for five new privately-owned banks, a move that will further increase competition. Arguably, foreign players with a focus on retail banking would need to ask themselves if this will continue to be a primary focus in the future.

The regulatory landscape continues to confront foreign players with respondents this year ranking it their second most significant challenge. The move towards renminbi internationalization and interest rate liberalization topped this list of concerns followed by the creation of the Shanghai Free Trade Zone. It is clear that to be successful in China, it is critical that the foreign players keep on top of regulatory change. Indeed, as this report went to press, China’s Legislative Affairs Office of the State Council issued draft regulations to introduce for the first time a bank insurance deposit scheme covering deposits up to a maximum of RMB500,000, expected to take effect from early 2015. Deposit insurance is considered a precondition for liberalizing deposit interest rates and the final step required in achieving interest rate liberalization. This change will have widespread impacts for both domestic and foreign financial institutions; however, foreign financial institutions will likely be better positioned to respond swiftly to this change when formalized.

Finally, partnerships with domestic players as a means to achieving market penetration and growth continues to evolve slowly. The 20% investment ceiling to restrict the shareholdings of foreign banks in domestic operations no doubt contributes to the appetite of foreign banks to explore this as a means to expanding their operations in China. Notably, respondents indicated the investment ceiling as the fifth most significant regulatory challenge they face. Given the relative influence a holding of that size provides, foreign banks should consider both the financial and strategic benefits of such an arrangement in their decision making.

The challenges for foreign banks are real, but not insurmountable, and the potential for rewards for those who drive growth in this market remain unparalleled.

EY would like to thank the CEOs and senior executives of the 41 foreign banks operating in mainland China who have contributed to this report. We would also like to thank the report’s co-author, Dr. Brian Metcalfe.

Foreword: EY’s insights on the report findings

Jack Chan Managing Partner, EY Greater China Financial Services



02. This report examines the future directions that foreign banks may take in mainland China. The interviews with CEOs and senior bank executives of foreign banks were conducted as China wrestles with the many issues surrounding financial reform and economic uncertainty.

It is now a year since the launch of the Shanghai Free Trade Zone (SFTZ) and while many foreign banks have set-up operations in the SFTZ, they have not yet been able to leverage its potential. Interest rate liberalization and renminbi (RMB) internationalization remain poised for further advancement.

Recent evidence suggests progress will continue in 2015. On 30 November 2014, a broad outline for a deposit insurance scheme was announced. Shortly thereafter, on 21 December 2014, rules governing RMB licenses for foreign banks were eased and the non-callable allocation of operating capital of no less than RMB 100 million or an equivalent amount in convertible currencies from the parent bank for set-up of a new branch was removed, both to be effective as of 1 January 2015.

A “big bang” moment was never anticipated. However, there is continued optimism that new opportunities may be just around the corner. Such opportunities will not only add new momentum to the foreign banks’ operations within China, but lead to an upswing in offshore businesses if, and when, controls on the RMB are finally relaxed.

Findings at a glance

Foreign banks are represented by over 400 different financial institutions in mainland China. This figure includes locally-incorporated foreign banks, branches, and subsidiaries. Foreign banks are present in 69 cities and 27 provinces in China.

In 2013, these banks had total assets of RMB2.56 trillion and after tax profits of RMB14.03 billion.

However, growth in the total assets of the foreign banks slowed to 7.66% in 2013 from 10.66% in 2012.

Foreign banks have made great efforts to build their presence in China. Based on China Banking Regulatory Commission (CBRC) Annual Report 2013, 42 foreign banks have established locally-incorporated units since 2007, and there are now 92 foreign bank branches. These banks hope to benefit from new opportunities inside China as a result of domestic financial reforms, but also increasingly, from opportunities that arise as Chinese corporates expand internationally across their global networks.

It is unlikely that many new foreign banking entities will enter the mainland China market over the next five years, with the exception of Taiwanese banks and banks from other parts of Asia.

Market shareThere has been significant discussions over the last few years on the market share of foreign financial institutions in China. Both foreign banks and foreign insurance companies have found it difficult to expand their respective market shares. If total assets are used as the metric, then the foreign banks have clearly failed to gain traction within the expanding Chinese banking industry.

At the end of 2013, foreign banks’ market share was just 1.73%, which was below the market share of 1.84% in 2004. However, market share in terms of total assets does not tell the whole story. Several participants mentioned that if onshore and offshore assets are included, the market share of foreign banks is around 4.9%. It also suggested that foreign banks’ share of the derivatives market is much higher, at around one-third.

02. Findings at a glance

Niche strategiesMost, if not all foreign bank entrants, have found the market challenging. As a result, most have adopted niche strategies focusing on areas where they have a particular expertise or competitive advantage.

For example, Spanish banks have attempted to leverage their strong position in Latin America, Japanese and Korean banks have serviced the needs of their home country corporates, and Australian and Canadian banks have tapped their resource sector skills and connections. Some foreign banks have attempted to cover both retail and wholesale banking while others have focused on very narrow market segments.

It is fair to say that at this stage of these foreign banks’ evolution and development in the world’s second largest economy, they would have hoped to have achieved more.

What is driving change?Against this background, it is important to consider the different drivers of change in the China marketplace. Participants in this survey readily identified a number of fundamental drivers that have the potential to change the financial market radically, and open new markets for foreign banks.



Regulatory changeThe financial reform agenda, which picked-up momentum after the Third Plenum in November 2013, promises to herald a new era and launch a raft of opportunities for foreign banks. This includes further interest rate liberalization, increased RMB internationalization, and the establishment of the Shanghai Free Trade Zone.

E-finance revolutionIn addition to regulatory reform, there is also the e-finance revolution and the new financial environment resulting from the digitalization of financial services. The e-finance revolution is driving changes in consumer behavior and also, being impacted by such changes.

Mobile bankingMobile banking and the power of social media are already creating new opportunities as well as threats for foreign banks that have entered the retail banking arena. The difficulties of limited physical distribution channels may be offset by the opportunity afforded by online and mobile banking. Strong global brands, state of the art technology, innovative, well-designed products, and excellent service may win the attention and interest of younger, upwardly mobile financial consumers.

Ownership in domestic banksThe slowdown in China’s economy may also persuade its regulators to adopt a more lenient approach towards foreign banks. At least 20 foreign banks have shareholdings in domestic banks, and are subject to the 20% investment ceiling (see Appendix D, page 84). While this report concludes that foreign banks’ interest in investing in domestic banks has receded, an economic downturn might provide an impetus for government to change the current restrictions which could revive foreign banks’ interest.

Less restrictive ownership regulations, under which a foreign bank was permitted to acquire more than a 50% shareholding in a mid-sized bank, might attract interest from foreign banks that have, to date, struggled to grow their branch networks. Domestic policy may also need to be amended if Chinese banks accelerate their acquisitions of foreign financial institutions in offshore markets. As Chinese banks service their clients in international markets, they will want to grow in size and scope. Acquisitions of banks overseas will facilitate this process. Demands for reciprocal treatment will inevitably follow.

This report finds that while the underlying drivers are in place, it is not clear when change is likely to occur or what its scope might be.

The challengesCurrent challenges facing foreign banks can be sub-divided into three categories: regulatory challenges, market growth challenges, and operational challenges.

Regulatory challengesThe most difficult regulatory challenge identified by survey participants in 2014, was access to the bond market followed by the myriad of rules and regulations, and capital and liquidity constraints. As China’s economy evolves, the foreign banks believe it is critical that the capital markets open up and that the foreign banks participate more fully in the bond market.

Rules and regulations continue to frustrate foreign banks. A large foreign bank, with a retail presence, commented that it now provides more than 6,000 different regulatory reports. Additionally, capital and liquidity constraints also impede the foreign banks’ efforts to expand.

Growth challengesThe three most important market growth challenges were attracting and retaining retail customers, margin compression, and competition from domestic banks. The retail-oriented foreign banks must find new ways to cement their relationships with clients. Domestic banks are formidable competitors. In March 2014, regulators approved the set-up of five new privately-owned banks. The entrance of new and innovative privately-owned banks will increase the level of competition. Three foreign banks now have proprietary credit cards, but mobile banking and payments may leapfrog traditional service offerings.

Operational challengesThe perennial operational challenge of recruiting and retaining personnel remains important. Although this year’s report finds increased levels of staff retention and a slowdown in salary growth, many domestic banks offer attractive packages to foreign bank personnel.

The legal environment and good governance in client companies are also challenging. Participants cited the market shock resulting from the Qingdao commodity fraud, which reportedly caused 25 international and local lenders to lose up to US$4.5 billion, as a result of traders reusing copper collateral many times.1 Several participants in this report are listed as plaintiffs, and media reports suggest they have made provision for hundreds of millions of dollars for potential losses.

1 Wall Street Journal, 3 July 2014


SFTZThe SFTZ has been heralded as a critical step in the financial reform process, and as a test laboratory for RMB products. Many of the larger, locally-incorporated foreign banks moved expeditiously to set-up inside the SFTZ. During the interviews, participants in this report predict that 20-25 foreign banks will set-up operations. As of 30 September 2014, twenty-three foreigh banks have registered in the SFTZ.

Three points summarize the views expressed by foreign banks on the SFTZ.

1. UncertaintyApproximately one year after the launch of the SFTZ, there remains uncertainty on the financial products that can be offered and to whom.

2. The cost/benefit of entryRegulators require a stand-alone accounting system for banking activity inside the SFTZ. Participants in this report say that the cost of such a system can range from US$2 million to US$10 million. They believe it is impossible to make a viable business case to head office, given the costs and resulting benefits.

3. Why move now?Smaller foreign banks, in particular, argue that if the objective is to rollout the SFTZ to other locations and perhaps also embrace all of Shanghai’s Lujiazui district, then why rush into the SFTZ?

The counter argument to these viewpoints suggests that first movers into the zone will be rewarded for their commitment, while latecomers may be restricted from future product offerings.

Top products in the SFTZAlthough the list of products that can be offered in the SFTZ remains unclear, participants frequently referred to opportunities associated with “cash pooling.” Those surveyed also mentioned opportunities related to trade finance and cross-border loans.

Participants also made reference to offshore Chinese renminbi (CNH) funding, mergers and acquisitions, and derivatives, including commodity and foreign exchange hedging.

Commitment from parent banksAgainst this background of predicted opportunity, tinged with market uncertainty, participants indicated that commitment from parent banks continues to grow. Only three participants said that support had declined over the last year, while 23 banks said support had increased. Parent banks remain fully committed to their China ventures. This suggests that if reform takes hold and new product and market opportunities unfold, then the foreign banks will respond with further investment in China.

Impact of shadow banksThe participants are divided regarding the impact of a potential deterioration in the shadow banking sector. Twenty banks believe it will have no impact on foreign banks while 15 banks believe there may be collateral damage. An October 2014 International Monetary Fund (IMF) report1

found that shadow banking financing amounted to 35% of China’s gross domestic product (GDP). The report also concluded that shadow banking is already stressing the domestic financial system, and will impact foreign banks through their cross-border bank lending.

Loan portfolios of domestic banksEighty percent of participants believed that the health of the domestic banks’ corporate loan portfolios had deteriorated in the last year. The stability of consumer loans was more balanced, 58% of foreign banks believe it has declined while 42% contend it remains the same. Interestingly, the majority of foreign banks believe market risk for the domestic banks remains the same, while half believe operational risk has increased.

Loan portfolios of foreign banksIn contrast to the assessment of the domestic banks, the foreign banks believe that corporate and consumer credit remains much the same as last year and there has been minimal deterioration. The China Banking Regulatory Commission (CBRC) non-performing loan ratio for foreign banks at the end of 2013, was 0.49% versus 0.52% in 2012.

02. Findings at a glance

1 Wall Street Journal, 3 July 2014


Most difficult regulatory issuesAccording to participants, the top five regulatory issues in 2014 are:

1. Removing the foreign debt quota

2. Removing the foreign guarantee quota

3. Insufficient coordination by regulators (for example, People’s Bank of China (PBOC), CBRC, and State Administration of Foreign Exchange (SAFE) all have roles in the emerging SFTZ)

4. Access to bond underwriting on the same basis as domestic banks

5. Removal of the withholding tax on offshore funding

Deposit insuranceOne of the key stepping stones in the liberalization of deposit rates is the introduction of a deposit insurance scheme. In late 2013, the Economist predicted it would be launched within months. The foreign banks believe it will not happen until 2015 and this view was supported by a PBOC announcement on 30 November 2014. Such a move is seen as a precursor to deposit rate liberalization in the short term, it will probably cause increased volatility and market uncertainty.

In general, foreign banks surveyed do not believe a deposit insurance scheme will have a direct impact on their business. However, it is expected to suppress margins further, and will be most directly felt by retail banks.

Liquidity pressuresDespite the more stable interest rate environment in 2014, foreign banks still expressed concern about liquidity management. Eighteen banks hold serious concerns. Closely related to liquidity concerns are funding sources. Thirty banks provided a breakdown of their funding sources for 2014 and 2017, and revealed a heavy dependence on the parent bank’s funding and corporate deposits.

The opening-up of the capital market envisaged in the financial reform process would greatly improve access to funding and ameliorate liquidity concerns.

Mobile bankingFinancial services in China are already impacted by the rapid growth in mobile banking. The domestic banks have been subjected to new mobile banking entrants, such as Alipay and WeChat.

Alipay is the market leader but Tencent’s social networking app, WeChat, may, in the medium term, be the more formidable competitor. It has the ability to act as an intermediary between customers and merchants.

As a result, traditional domestic banks may in time be relegated to the back-end of the transaction process. Back- end payments will continue to be provided by credit and debit cards offered by the domestic banks.

Presently, three foreign banks offer proprietary bank cards. Before the entrance of players such as Alipay and WeChat, they may have viewed the credit card or debit card as a key component in building their retail brand. New payment innovations in the mobile space will make this process more challenging.

The disruptive forces already developing in retail banking will have an impact on retail-oriented foreign banks. This report discusses the liberalization of deposit rates in the banking market, but most participants address this change in the context of corporate banking. Demand deposits in the domestic banks are already under threat by innovators such as Alibaba’s internal money market fund, Yu’ E Bao. Deposit rate liberalization will cause further disruption, when it occurs.

In September 2014, Alibaba’s financial unit was reported to be in talks with the Hong Kong Monetary Authority (HKMA) regarding a Hong Kong version of its Yu’ E Bao money market fund. Yu’ E Bao accumulated assets of RMB574 billion (US$94 billion) in the first year of operation to June 2014.2 Yu’ E Bao is managed by Tianhong Asset Management. Tencent’s WeChat app permits users to transfer money into a fund managed by the mutual fund giant, China Asset Management.

Although it is still early days, foreign banks do not appear to have addressed the fast moving changes in the mobile banking space. Only nine participants commented on a question relating to how they planned to introduce e-finance, mobile banking, and data analysis initiatives.

2 Financial Times, 28 September 2014


Performance and growthAlthough profitability for the foreign banks dipped in 2013, survey responses projecting forward to 2017 were positive. Twenty banks expect performance to increase slightly while 18 banks expect a significant improvement.

Participants looking back over the last 12 months reported that the three areas experiencing strongest revenue growth were trade finance, corporate lending, and treasury.

The retail banking environment is challenging. Over the last year, growth in mortgages and credit cards has been difficult, although personal loans appear to be performing well.

Thirty-four banks provided forecasts on their return on equity (ROE) in 2015, and on their ROE in three to five years.

Only two banks predict an ROE below 10% in both time periods. At the top end of the scale, three banks expect 19%–21% returns while four banks expect returns of 19%–21% in three to five years.

Future growthFour areas of opportunity for future growth are expected to increase significantly. These are leveraging the banks’ international networks, trade finance, cash management, and corporate lending. Thirty-four banks provided revenue growth projections for 2014 and 2017. Many banks are clustered in the 8% to 15% for both 2014 and 2017, but 13 banks expect 20% or more revenue growth in both 2014 and 2017.

Margin squeezeWithin a group of 35 respondents, only one contrarian believed margins were not being squeezed. Thirteen banks said margin compression was already moderate, while five banks reported extensive compression.

Key segments The foreign banks attribute different degrees of importance to six market segments, these are state-owned enterprises (SOEs), privately-owned enterprises (POEs), small- and medium-sized enterprises (SMEs), financial institutions, global corporates, and high-net-worth individuals (HNWIs). Participants ranked these markets from 1 to 10, 1 being least important and 10 being most important. The rankings given by each participant reflect their own market focus.

Many participants attributed high scores to both the SOEs and POEs in 2014. Scores for the SMEs sector have increased over 2013. Eighteen banks scored financial institutions between eight and 10. Nine banks scored the maximum score of 10 for global corporates. Reflecting the narrower appeal of marketing to HNWIs, only eight out of 20 respondents scored this segment 8 to 10.

Hiring prioritiesA comparison of the top hiring positions between 2013 and 2014 revealed that the order and importance of the top three remain unchanged. They are relationship bankers in the corporate area, compliance and legal personnel, and risk management personnel.

A notable difference in 2014 was the priority given to relationship bankers dealing with financial institutions. This group move up from 13th position to 4th.

This reflects an increased involvement in the interbank market, which may be driven by concerns regarding liquidity management.


Hints of a reduction of staff turnoverTen banks predicted a decline in staff turnover in 2014. Sixteen banks expected rates below 10%, and a further 11 predicted turnover in the 10% to 14% range. A group of mostly retail-based banks envisage higher rates, but the general trend suggests that there is less movement between banks.

Salaries are expected to increase by around 8% in 2014. No foreign banks expect increases above 10%, which contrasts with last year.

As in 2013, foreign banks believe that their salaries remained above the domestic banks. However, many contend that salaries are comparable at the middle management and support levels.

Many respondents pointed out that domestic bank employees enjoy a range of fringe benefits. Media reports in September 2014, suggested that the heads of domestic banks and SOEs may see their salaries capped at around US$100,000.




03. Overview of the current landscape

Foreign bank presenceForty-two locally-incorporated foreign banks, 92 branches, and 187 representative offices operated in China at the end of 2013, based on CBRC Annual Report 2013. (Refer to Appendix A for a list of locally-incorporated foreign banks.)

Within this group of foreign banks:

• 30 locally-incorporated foreign banks and 27 branches were permitted to offer derivatives.

• Six locally-incorporated foreign banks were authorized to issue RMB financial bonds.

• Three locally-incorporated banks were approved to issue proprietary credit cards.

The CBRC reports that foreign banks were present across 69 cities in 27 provinces. The map at Figure 11 shows the distribution of branches and outlets of the “Big Six” retail foreign banks (by branch network). In its 2012 report, the CBRC indicated that foreign banks had a presence in 59 cities.

Foreign banks

Wholly foreign-owned banks

Joint-venture banks

Wholly foreign-owned finance companies Total

Locally-incorporated institutions (LII)

39 2 1 42

LII branches and subsidiaries

282 3 285

Foreign bank branches

92 92

Branches 9 509 10 528

Total 101 830 15 1 947

Figure 1: Foreign banking establishments in China as of 31 December 2013

Source: CBRC Annual Report 2013


Total assets of foreign banks and market share in 2013Although the total assets of foreign banks grew by 7.66% in 2013 to RMB2.56 trillion, their market share measured in total assets dropped to 1.73% in 2013. This market share figure is below the level recorded nine years ago in 2004.

As a group, the foreign banks had total assets of RMB2.56 trillion and generated after tax profits of RMB14.03 billion. This was below the 2012 figure of RMB16.34 billion.

Item/year 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Number of institutions*

188 207 224 274 311 338 360 387 412 413

Assets** 5,823 7,155 9,279 12,525 13,448 13,492 17,423 21,535 23,804 25,628

As % of the total banking assets in China

1.84 1.91 2.11 2.38 2.16 1.71 1.85 1.93 1.82 1.73

* Including headquarters, branches and subsidiaries** RMB100 millionSource: CBRC Annual Report 2013

Figure 2: Foreign banking institutions in China, 2004 to 2013

Figure 3: Foreign bank ratios, 2013

Liquidity ratio 72.42%

Nonperforming loans (NPL) ratio 0.49%

Deposit growth in 2013 4.72%

Loan growth in 2013 6.47%

CBRC provide a number of ratios pertaining to the foreign banks as a group. At the end of 2013, CBRC noted that the foreign banks liquidity ratio increased modestly from 68.77% in 2012 to 72.42%.

The non-performing loans percentage for foreign banks dropped from 0.52% in 2012 to 0.49% in 2013.

Deposits for all foreign banks in China grew by 4.72% in 2013, while total loans grew by 6.47%. Source: CBRC Annual Report 2013


Growth in banking assets in China since 2008The chart below demonstrates the steady growth in banks’ assets in China between 2008 and 2013.

The dominant position of the large commercial banks is evident in both the asset growth chart in Figure 4 and in the bank after-tax profits table in Figure 5.

Source: CBRC Annual Reports 2007-2013Urban credit cooperatives, rural credit cooperatives (RCCs), non-bank financial institutions, new-type rural financial institutions, and the postal savings bank (PSB) have been omitted.

Figure 4: The growth in bank assets, 2008 to 2013

300,000

0

600,000

900,000

1,200,000

1,500,000

Foreign banks

Rural commercial banks

City commercial banks

Joint-stock commercial banks

Large commercial banks

Policy banks and NDB

201320122011201020092008

RMB


Figure 6: After-tax profits of all banks, 2007 to 2013 (in RMB100 million)

2007 2008 2009 2010 2011 2012 2013All banking financial institutions (Fls)

4,467.3 5,833.6 6,684.2 8,990.9 12,518.7 15,115.5 17,444.6

Policy banks and National Development Bank

489.3 229.8 352.5 415.2 536.7 736.3 922.1

Large commercial banks 2,466.0 3,542.2 4,001.2 5,151.2 6,646.6 7,545.8 8,382.3

Joint-stock commercial banks 564.4 841.4 925.0 1,358.0 2,005.0 2,526.3 2,945.4

City commercial banks 248.1 407.9 496.5 769.8 1,080.9 1,367.6 1,641.4

Rural commercial bank 42.8 73.2 149.0 279.9 512.2 782.8 1,070.1

Rural cooperative banks 54.5 103.6 134.9 179.0 181.9 172.2 162.1

Urban credit cooperatives 7.7 6.2 1.9 0.1 0.2

RCCs 139.4 219.1 227.9 232.9 531.2 654.0 729.2

Non-bank financial institutions 333.8 284.5 298.7 408.0 598.8 825.5 1,059.7

Foreign banks 60.8 119.2 64.5 77.8 167.3 163.4 140.3

New rural FIs and PSB 6.5 6.5 32.2 119.0 257.9 340.7 390.3

After tax profits of banks in 2013While the after tax profits of the large commercial banks and the city commercial banks have grown steadily from 2007, the foreign banks have experienced fluctuations in profits.

Profitability in both 2011 and 2012 exceeded the figure for 2013.

Figure 5: After-tax profits of banks in 2013 (in RMB100 million)

Rural commercial bank1,070

Non-bank financial institutions1,060

Large commercial banks8,382

Joint-stock commercial banks2,945

City commercial banks1,641

New rural FIs and PSB390

Policy banks and NDB922

Rural coop banks 162

RCCs729

Foreignbanks 140

Source: CBRC Annual Reports, 2008 to 2013

Source: CBRC Annual Report 2013


Background statistics on banking in China Cost-to-income ratioTwenty banks provided an estimate of their cost-to-income ratio for 2014, and 18 banks estimated their ratio for 2017. The ratios ranged from unusually low at 15% to a high of 80%. The bank that gave the 15% estimate was a European bank and expected the ratio to rise to just 20%. The bank that gave the 80% estimate was also a European Bank, and it anticipated the ratio to drop to 50% by 2017. Eight banks suggested their cost-to-income ratios would remain the same over the next three years. Seven banks expect their ratios to improve, while three banks expect their ratios will rise. Two banks were unable to provide a 2017 estimate.

Figure 7: Corporate and banking sector fundamental ratios for China

Figure 8: Participant’s estimates of their cost-to-income ratios for 2014 and 2017

Corporate sector

Change in corporate credit spreads (basis points)3

–3

Real GDP growth, 2014 7.4

Corporate sector4

Leverage: total debt-to-total equity 29

Profitability: return on assets 2.5

Debt service capacity: EBITDA-to-interest expense

6.6

Banking sector

Assets

Asset quality: gross NPL ratio 1.0

Profitability: return on assets 1.3

Funding

Reliance on noncustomer deposit funding5

22

Liquidity buffers: total loan-to-total deposit

57

Buffers

Loss-absorbing buffers6 10.0

Provision coverage7 283

Source: IMF report, October 2014

3 Change in JPMorgan’s Corporate Emerging Markets Bond Index (CEMBI) spreads for 2014:H14 Sample median5 Total Liabilities minus Tier 1 Capital minus Customer Deposits, all divided by Total Liabilities minus Tier 1 Capital6 Tier 1 Capital plus Loan Loss Reserves minus NPL, all divided by Risk-Weighted Assets7 Refers to the ratio of specific provisions to NPL, as defined by the Financial Soundness Indicators

Cost to income ratio (%) 2014 2017

European bank 80 50

Asian bank 76 54

Asian bank 70 60

European bank 65 65

Asian bank 60 50

Asian bank 57 55

North American bank 55 55

Asian bank 50 40

Asian bank 50 50

European bank 50 50

European bank 50 45

North American bank 50

Asian bank 45 45

European bank 45 60

European bank 45 45

Asian bank 40

European bank 35 35

European bank 25 45

North American bank 20 20

European bank 15 20


Expectations around increasing market shareThe majority of banks expect market share over the next three years in both tier 1 cities and beyond tier 1 cities to remain the same. Eleven banks believe it may increase in both tier 1 cities and beyond. In 2013, 16 banks predicted an increase in tier 1 cities and beyond. Participants in 2014 appear less optimistic that they will be able to gain market share from the domestic banks.

Figure 9: Market share, 2003 to 2013 Figure 10: Market share in tier 1 cities and beyond

0.0

0.5

1.0

1.5

2.0

2.5

20132012

20112010

20092008

20072006

20052004

2003

Marketshare

%

DecreaseStay the sameIncrease

23 banks expecttier 1 to remain

the same

21 banks expectbeyond tier 1 to

remain the same

Based on responses from 40 banks


Source: CBRC Annual Reports 2003-2013


Figure 11: Big six retail bank networks in 2014

Geographic expansion continuesThe branch networks of the “Big Six” retail banks, Bank of East Asia, Citibank, DBS, Hang Seng Bank, HSBC, and Standard Chartered Bank, are shown in the map below.

Source: Individual bank websites, information consolidated by Dr. Brian Metcalfe In addition to the branches shown above are Xinjiang BEA 2, Nei Menggu SCB 1, and Heilongjiang HSBC 1 and BEA 1. Data shown as of 2014 has been obtained from the websites of the six largest foreign retail banks based on network size. Please note data may not be kept up to date by the banks; consequently, some deviation may exist.


Expectations surrounding the SFTZThe SFTZ was formally announced over a year ago. Participants were asked to express their opinion on whether or not expectations surrounding the launch had been fulfilled.

Over 80% of participants concluded that to date, expectations had not been achieved.

A European bank and a North American bank commented that they never expected the pace of introduction to be fast. A seasoned European banker observed that he “had seen it all before.”

An Asian bank contended that preliminary regulations had been set-up, but there was now a need for much greater clarity.

Several participants mentioned the overlapping responsibilities of various regulators, including the PBOC, CBRC, SAFE, and the China Securities Regulatory Commission (CSRC).

How many foreign banks will enter the SFTZ?Twenty-five banks provided an estimate of the number of foreign banks expected to enter the SFTZ.

The chart suggests that around 20 to 25 foreign banks will set-up operations inside the SFTZ. As of 30 September 2014, 23 foreign banks have already registered in the SFTZ. This figure does not suggest that all of the locally-incorporated foreign banks will enter. It also confirms the uncertainty that continues to exist in the foreign banking community concerning the benefits of entry and the difficulty in making a robust business case.

Figure 12: Have the opportunity expectations been fulfilled?

Figure 13: Number of foreign banks expected in SFTZ in three years

0

1

2

3

4

5

6

7

8

403530252015

Numberof

responses

Estimated number of banks in SFTZ by 2017Based on responses from 25 banks

Banks

31 banksbelieve expectations

have not beenfulfilled



Figure 14: SFTZ entry decision by foreign banks

Decisions around entry to the SFTZThirty-five banks provided insight on whether they have already entered the SFTZ or had plans to do so in the next three years.

Figure 14 shows that approximately one-third have already entered or have plans to do so. However, nine banks indicated that the decision to enter was still under review, while 13 banks said that they had made a decision not to set-up presence inside the SFTZ.

Decided notto enter

Already set-upa branch

Plan to enterin the next year

Under reviewno decision taken


13 banks decided not to

enter



Figure 15: Regulatory challenges

How foreign banks rank the challenges they face in ChinaParticipants were asked to score three different categories of challenges they face in operating a foreign bank in China. These are regulatory, operational, and market growth challenges.

Regulatory challengesIn the 2013 report, rules and regulations were considered the most onerous regulatory challenge faced by foreign banks. There was a general feeling by the participants that the regulators, faced with wide ranging financial reform, have slowed the pace of new regulations.

Access to the bond market was identified by foreign banks as the most pressing challenge in 2014. It was also the only one of the six regulatory challenges to increase in score in 2014.

Capital and liquidity constraints remained in third place, followed by branch expansion limitations.

0 1 2 3 4 5

The 20% ownership restriction

Ability to differentiate services

Branch expansion limitations

Capital and liquidity constraints

Rules and regulations related to foreign banks

Access to the bond market

Score on a scale of 1 to 5 with 5 being the greatest challenge

20142013


Market growth challengesIn 2014, margin compression dropped into second place while attracting and retaining retail customers moved into top position. The latter challenge, which applied only to locally-incorporated foreign banks with a retail presence, suggests that foreign banks continue to make significant efforts to grow their retail franchises. In contrast, the ability to attract and retain corporate customers ranked much lower.

Both RMB internationalization and shadow banking scored below three, which suggests that foreign banks are disengaged from the shadow banking sector and do not find RMB internationalization a challenge. Instead, RMB internationalization is viewed as an opportunity governed by the pace of market reform.

Figure 16: Market growth challenges

Score on a scale of 1 to 5 where 5 is the greatest challenge

0 1 2 3 4 5

Shadow banking competition

RMB internationalization

Economic performance

Brand awareness

Attracting and retainingprofitable corporate customers

Building a customer base

Non-performing loans in the industry

Keeping costs in line with growth

Foreign bank competition

Domestic bank competition

Margin compression

Attracting and retainingprofitable retail customers

20142013


Operational challengesAttracting and retaining skilled personnel remains the primary operational challenge. This is unchanged from last year’s report. As noted further on, the economic slowdown has reduced the level of employee movement between banks. In spite of this, human resources remain a major challenge.

The biggest three challenges, after attraction and retention of skilled personnel, are the legal environment, client company governance issues, and the tax environment. Although profits for foreign banks as a group dropped in 2013, profitability also fell in importance from third to fifth place in this year’s survey. A number of participants commented that performance during the first half of 2014 has been positive, and this may have influenced this score.

Figure 17: Operational challenges

Score on a scale of 1 to 5 where 5 is the greatest challenge

0 1 2 3 4 5Accounting environment

Risk management

New technologies

Data quality and ability to leverage it

Keeping costs under control

Tax environment

Profitability

Good governance in client companies

Legal environment

Attracting and retaining skilled personnel

20142013


Setting-up in the SFTZSurvey participants believe that around 20-25 foreign banks will set-up operations in the SFTZ. Estimates ranged from just 15 foreign banks up to 38 foreign banks entering the zone.

Some of the smaller foreign banks argued that if the goal is to roll out the zone’s liberalized financial environment to other locations, and ultimately nationwide, then it would be better to wait for these broader changes rather than incur the expense of setting-up inside the zone. Those participants already committed to the zone countered this opinion by stressing the competitive advantage in being one of the first to set-up in the zone. Some also suggested that their readiness to enter the zone may be rewarded by the regulatory authorities.

Significant debate centered on the cost of setting-up inside the zone. Participants emphasized that they are required to set-up a separate accounting system. Estimated set-up costs for such a system ranged from US$1 to US$2 million, up to around US$10 million. The expense of the system reflects the size and scope of business to be undertaken.

A number of participants who indicated that they do not plan to enter the SFTZ said that they could not make a business case to their parent bank, given the uncertainty surrounding products that could be offered in the SFTZ. These banks have adopted a wait and see approach. One of these banks said that foreign banks with large dealing rooms may be able to make a business case to enter the SFTZ if they arbitraged offshore and onshore RMB. For example, hypothetically a spread of 2% (onshore RMB at 5% versus offshore RMB at 3%) on US$1 billion, would generate US$20 million and justify the business case.

Top products to be offered by the foreign banks in the SFTZSeveral participants commented that transaction banking and payment services would be the cornerstone of business in the zone.

The top product mentioned at this early stage of the SFTZ’s development was cash pooling. Cash pooling, for example, may allow companies to unlock liquidity trapped on the Chinese Mainland or permit surplus funds from overseas to assist in Chinese Mainland operations.

Trade finance was the second most commonly mentioned product area, followed by cross-border loans. In addition to these terms, participants also made specific reference to:

• CNH funding in the zone

• Mergers and acquisition services

• Providing domestic companies in the zone with banking services, participants referenced trading manufacturing and logistics companies

• Derivatives, including commodity

• Foreign exchange hedging

Internationalization of the RMBThe RMB has evolved from being used to settle international trade payments to providing investment and lending opportunities in international financial markets. Increases in trade flows have resulted in a growing pool of offshore RMB funds.

China’s government has facilitated the creation of RMB backflow channels, to foster further internationalization of the currency.

Chinese companies are now able to settle global transactions for goods and services in RMB. These cross-border transactions limit exchange rate exposure, reduce conversion costs, and make payments easier.

Backflow channels have also embraced RMB denominated foreign loans, as Chinese companies engage in more offshore funding and RMB denominated bonds.

The SFTZ is already participating in an expansion of the RMB backflow channel, and foreign banks anticipate that this will continue to grow.

At the same time, domestic companies located in the SFTZ are able to incur RMB denominated foreign debt, while multinationals can benefit from cross-border cash pooling assisted by foreign banks.


Source: MarketWatch, 15 October 2014

Citi launches automated RMB cross-border sweeping from China to London

Building on its global RMB cash-pooling solutions, Citi has today announced the implementation of its first RMB Cross- Border Auto Sweeping structure from China to London. The latest development allows Citi to offer live automated RMB cross-border sweeping in China, Hong Kong, Singapore and London.

Citi’s global concentration engine allows clients to sweep true end-of-day balances into London without any loss of value. This platform also comes with tracking and reconciliation of intercompany loan positions, automated mechanisms to control lending positions, as well as reporting to meet local regulatory and reporting requirements.

Rajesh Mehta, EMEA Head of Citi’s Treasury and Trade solutions said: “Automated RMB sweeping to London is an important addition to Citi’s RMB footprint, given that London has traditionally been the center for managing currency risk. We have a number of clients already manually concentrating their RMB into London as part of multi-currency pools to leverage RMB liquidity and centralize management of FX exposures; our new automation capability makes this process even more efficient for clients.”

Sandip Patil, Asia-Pacific Head of Liquidity Management added: “With our local depth and global concentration platform, Citi enables our clients to integrate RMB effectively into their treasury and liquidity structures, irrespective of location, truly paving the way for the RMB’s development as an international currency. Our success in replicating our G10 expertise and capabilities into the RMB space is playing a critical role for our clients.”

The structure has been put in place for Swiss-based Pentair – a global water, fluid, thermal management and equipment protection partner – and was implemented using Pentair’s registered entity in the SFTZ (SFTZ), thus enabling the company to integrate its daily working capital RMB balances into its global cash pool. Benefits will include improvements in the company’s liquidity management, capital utilization efficiency, reduced cost in cross-border transactions, as well as intragroup financing and foreign exchange benefits.

Terri Scherber, Senior Treasury Director at Pentair, said: “Pentair was keen to take advantage of the newly deregulated SFTZ policies and connect our domestic RMB funding structures to our global liquidity pool. Citi’s automated sweeping solution now provides us a much more efficient way of managing this process.”

Amit Agarwal, EMEA Head of Liquidity Management Services at Citi, said: “Citi has one of the most extensive geographic and currency footprints, supporting some of the most sophisticated treasury management structures. The incorporation of RMB into London-based cash pools will be of significant benefit to both Chinese and multinational companies in the SFTZ, allowing them to capitalize on interest increases, effectively offset overdrafts in low-yield, hard currencies, as well as achieve greater visibility and improved risk management.”


Source: HSBC Global Connections, 20 March 2014

HSBC pioneers two-way cross-border RMB cash pooling business

On 21st February 2014, HSBC China launched a centralized renminbi (“RMB”) cross-border transaction management solution for its corporate clients in the China (Shanghai) Pilot Free Trade Zone (“Shanghai FTZ”) by delivering the new service to Saint-Gobain via its subsidiary in the pilot zone. This innovative cash management solution covers functions including pay-on-behalf and receive-on-behalf (“POBO/ROBO”) and netting.

Saint-Gobain, the world leader in the habitat and construction markets, designs, manufactures and distributes high performance building materials, providing innovative solutions to the challenges of growth, energy efficiency and environmental protection. Since entering China in 1985, Saint-Gobain has invested over EUR2 billion in the market and grown the business rapidly. Via its subsidiary in the Shanghai FTZ, it is able to centralise payments and collections for merchandise and services trade settlement, along with other current account items, and subsequently improve the efficient use of RMB settlement within the group. This solution thus also enhances the cash management efficiency for its Asia Treasury Centre located in Shanghai.

Centralized payments and collections is an efficient cash management solution for multinational companies’ need to manage intra-group account payables and receivables. The newly-launched scheme in the Shanghai FTZ now applies to RMB cross-border settlement, enabling corporates to consolidate and offset account payables and receivables through a single transaction.

Centralized RMB cross-border payments and collections will bring significant benefits to our clients by simplifying their payment processes, reducing the number of transactions and unlocking additional liquidity. It therefore helps improve the efficiency of funding management and settlement, reducing funding cost and foreign exchange risk.

Currently, market demand for cross-border RMB cash management comes from three sources. The first of these is the need for cross-border capital flow, including investing surplus corporate capital in offshore markets, and Chinese businesses seeking to capitalize on overseas opportunities for financing. The second source concerns corporate demand for centralized and automated cross-border trade settlement. The third one is the need for full convertibility of the RMB. Although some Chinese businesses have developed onshore pooling services in the past, there is still pressing demand for further expansion of these services into a platform for regular cross-border cash management. It’s equally imperative is to develop, based on actual needs, a cross-border investment and financing mechanism. When both are done, a two-way cash pool will be in place.

Cross-border RMB pooling is an experimental effort for HSBC and provides an effective solution for MNCs to channel funds across Chinese borders. This will help corporates to sweep and integrate working capital for their Chinese and international business and even link it up with global pools automatically. Cross-border RMB pooling represents an opportunity to make corporate treasury much more convenient and transparent, allowing businesses to better manage their liquidity.

In the long term, innovative policies developed for the SFTZ will link up China with global funding channels, a development with strategic implications. Currently, MNCs tend to establish a network of treasury centres (cash pools) around the world, with Asia-Pacific operations overseen from Hong Kong or Singapore.

Two-way cross-border RMB cash pooling, as launched by HSBC, will become one of the major factors attracting MNCs to set up their Asia-Pacific headquarters in the SFTZ; the city currently hosts 200 such regional headquarters. The service will also open up a new gateway for corporates to globalize their cash management.


Source: www.sonepar.ca, 16 June 2014

Sonepar and RBS completes the first RMB Cross-border cash pooling in Shanghai FTZ

Sonepar has become the first French company to implement two-way RMB Cross-border Cash Pooling in the SFTZ (FTZ). Sonepar is an independent family-owned company with global market leadership in B-to-B distribution of electrical products and related solutions. Founded in 1969, Sonepar employs 36,000 associates at 190 entities in 38 countries. The Royal Bank of Scotland (RBS) recently launched this innovative financial solution for multinational companies (MNCs) registered in the Shanghai FTZ.

The RMB Cross-border Cash Pooling is an extension of the service RBS provides to Sonepar’s regional treasury center in Hong Kong, supporting their operations in nine markets across Asia.

Sonepar has identified Asia is a key growth driver for the group with China contributing the largest share. “We are excited to be the first French company to have the ability to conduct two-way cross-border RMB sweeping through our subsidiary in the FTZ. The RBS facility means our regional treasury center in Hong Kong is able to integrate with our China entities’ onshore RMB cash pools. This not only brings greater transparency to our operations in the Mainland, but equally important is that it enables us to deploy RMB liquidity between our onshore and offshore affiliates effectively,” said Mathieu Raffestin, Senior Vice President of Finance, Sonepar Asia-Pacific.

“With liquidity management being more important than ever, especially for a company with a global reach like ours, we were looking for solutions that would not only improve our performance in Asia, but also act as the springboard for our expansion plans in the region. Adding the RMB two-way cross-border sweeping to our regional cash management capability, will be a tremendous support to our ambitious growth strategy in China.”

Commenting on the successful implementation, Manfred Schmoelz, Head of Global Transaction Services, Asia Pacific said: “We are delighted that through this innovative financial solution, RBS is able to help Sonepar in driving greater efficiency in its regional treasury management. This is also an exciting development in conjunction with the Chinese government’s continuing efforts to liberalize the use of RMB for international transactions.”


The most important developments according to the foreign banksThe two most important developments occurring in the Mainland China banking market, from the perspective of foreign banks, are RMB internationalization and liberalization of interest rates.

Both factors are mentioned on an equal basis by most of the survey’s participants. In third position is the SFTZ. Many participants believe that the Chinese Government is genuine in its desire to reform the financial system. However, they caution that the pace of reform is subject to a myriad of different and often unpredictable forces.

A North American bank commented that reforms were occurring at a fast pace, and that China should be viewed as an “emerging financial market.”

Other important developments mentioned by participants can be summarized under the following headings:

• Cross-border movement of funds

• Shadow banking and its future regulation

• Disintermediation of Chinese banks by large Chinese corporates

• Changes related to RMB loan quotas

• The loan to deposit ratio (LDR) and future changes

• Chinese corporates expanding internationally

• Interest rate and foreign exchange reform is expected to take place in measured stages

• Fast-paced change is not anticipated

Threats in the marketsSome of the drivers of change mentioned in the previous section, overlap with perceived threats, that may create shocks in the market in both the short and medium term.

A list of such threats raised by participants is listed below. The order in which these threats are listed does not reflect any priority or enhanced importance.

• Economic uncertainty

• Slowdown in government spending

• Liquidity fluctuations

• Non-performing loans in domestic banks

• Shadow banking

• Trade finance fraud

• Consumer complaints on wealth management products

• Interventions by CBRC, PBOC, and SAFE

• E-finance and its impact on traditional channels

• Surplus capacity (over investment by SOEs and POEs) in certain industrial sectors, such as steel

Immediate issuesThe participants were asked to identify the critical issues they faced in the banking market. Four issues were mentioned repeatedly. Liquidity was considered a very important issue, and a number of banks mentioned the need to monitor closely and match requirements on a quarterly basis.

Participants also mentioned a lack of access to capital, and a number commented on the difficulty faced in growing their loan portfolio when capital is in short supply.

Interest rate liberalization, and how it will continue to evolve, also adds market uncertainty and requires careful monitoring. Credit quality, not for foreign banks but in the wider market, is also a concern.

In addition, participants raised the following issues:

• Regulatory transparency

• The shadow banking sector

• A lack of scalability given their current business models

• The threat of an economic downturn

• Future developments in the real estate market


What is driving change?Participants had little hesitation in suggesting a series of different factors driving change.

These include the regulatory reforms, the move towards RMB internationalization and interest rate liberalization. There are a number of different technology drivers, which are occurring in both the retail and wholesale markets. The e-finance revolution is only beginning, but it will play a major role, albeit subject to regulatory responses.

Changes in customer behavior was frequently cited as a driver. Retail consumer behavior is changing, with younger customers enthusiastically embracing the transition to mobile banking.

The move by Chinese corporates to expand internationally is forcing the domestic banks to internationalize, and simultaneously providing the global networks of foreign banks with new opportunities.

Economic drivers will also cause change in financial markets. Foreign banks noted how an economic slowdown may cause a rise in NPLs and possibly a shake out of non-bank financial institutions and some mid-sized banks.

Foreign banks and the shadow banking sectorForeign banks were divided on the potential impact of the shadow banking sector.

While 20 banks believe that shadow banking has no impact on their business, 15 banks held the opposite opinion.

Those that believe shadow banking does have an impact acknowledge that they have little or no involvement with the sector, but held they could be indirectly affected.

Support from parent bankForeign banks continue to provide strong support to their China-based operations. Over half the respondents indicated that support had grown in 2014.

Only three banks believe they received less support than in 2013. This included two European banks.

Twenty-three banks said that support had increased. Several banks also commented that they had increased their capital base over the last year.

Factors mentioned by participants surrounding the support of their parent bank included the recognition within China of the need for financial reform; board support for a new branch and expansion of their product line; an expanding client base of Chinese companies in Europe; market liberalization and an expansion in trade between China and the country in which the parent bank is headquartered in.

Figure 18: Level of support from parent bank

Moresupport

Equalsupport

Lesssupport


23 banks havereceived more

support

Figure 19: Shadow banking impact on foreign banks’ business

No Yes

15 banks said shadow banking had

an impact on their activities




Insights on the health of credit and risk in the corporate and retail marketsSurvey participants provided their views on the current health of a number of markets, from both domestic bank and foreign bank perspectives.

Domestic banksAlmost 80% of the foreign banks believed that corporate credit provided by the domestic banks has deteriorated since 2013. Forty-eight percent of participants believe that the health of consumer credit has declined and 52% believe it remains the same.

Only one-third believe that market risk has deteriorated while 58% think it remains the same.

Finally almost half the group believe that operational risk has worsened.

Figure 20: Foreign banks’ perception of domestic banks’ credit and risk assessment in 2014

Figure 21: Foreign banks’ perception of domestic banks’ credit, 2014 compared to 2013

0 20 40 60 80 100

Operational risk(37)

Market risk(36)

Consumer credit(21)

Corporate credit(37)

Number of participant responses shown in parentheses

WorseSameBetter

Corporate credit

2013

2014

WorseSameBetter

Consumer credit

2013

2014

WorseSameBetter

Based on responses from 37 banks in 2014 and 36 banks in 2013



Foreign banksParticipants believe the status of loans looks much better for foreign banks. Only 11% of the 35 respondents think the health of corporate credit provided by them, has declined in the last year. Eighty-three percent think that consumer credit in the foreign banks remains the same as last year. Seventeen percent think it has deteriorated.

From a foreign banks’ perspective, 3% think it is worse while 17% think it has improved and 80% believe the status quo remains. Seventy-eight percent believe operational risk is the same as in 2013 and only 8% think it has declined.

A comparison with the opinions provided in the 2013 survey shows a continued decline in corporate credit’s health at the domestic banks, and a more dramatic decline in consumer credit this year.

From a foreign bank’s perspective, corporate credit appears to have marginally improved, while there has been a slight decline in consumer credit.

Figure 22: Perceptions of foreign banks’ own credit and risk assessment, 2014 compared to 2013

Figure 23: Perceptions of foreign banks’ credit, 2014 compared to 2013

Foreign banks’ corporate credit

2013

2014

WorseSameBetter

Foreign banks’ consumer credit

2013

2014

WorseSameBetter

0 20 40 60 80 100

Operational risk(36)

Market risk(35)

Consumer credit(12)

Corporate credit(35)

Number of participant responses shown in parentheses

WorseSameBetter





04. The regulatory framework

The most important regulatory issues in 2014The top five regulatory issues facing foreign banks in 2014, according to survey participants, are:

1. Removal of the foreign debt quota

2. Removal of the foreign guarantee quota

3. Coordination between regulators

4. Equal access/rights as domestic banks to the bond underwriting market

5. The 10% withholding tax on offshore funding

Survey participants were asked to score regulatory issues on a scale of 1 to 10, with 1 being the least important and 10 being the most important. Scores for the first four issues have increased over last year’s ratings.

Figure 24: The top five regulatory issues in 2014 compared to 2013

0

2

4

6

8

10

Equal

acce

ss/rig

hts as

domes

tic ba

nks t

o the

bond

unde

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ing m

arket

Waive t

he 10% w

ithho

lding

tax o

n offs

hore

fundin

g

Level

of co

ordin

ation

by re

gulat

ors,

(PBOC, C

BRC, etc.

)

Remov

al for

eign g

uaran

tee qu

ota

Remov

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Score

20142013

Foreign debt quotaIn April 2014, SAFE lifted the total amount of short-term foreign debt banks and companies can borrow to US$43.392 billion, which according to Reuters is a 16% increase from 2013. Within this total, US$13.9 billion is allocated to domestic banks, while US$16.54 billion is allocated to foreign banks.8 SAFE awards different quotas to foreign banks based on decisions related to bank size and the loan’s purpose. As a result, some participants are unhappy with their allocation, while others believe it was a non-issue.

Changes in the loan to deposit ratioAnother regulation mentioned by participants, but not ranked in the top five was the loan to deposit ratio, which was redefined on 30 June 2014. This change seeks to stimulate bank lending in the real economy. The new formula excluded agro-related and SMEs financial debts as loans. Locally-incorporated foreign banks were permitted to include funding from their parent bank, provided the maturity exceeds one year.

8 Reuters, 8 April 2014



Copyright: China Banking Regulatory Commission ADDR:Jia N0.15 Financial Street, Xicheng District, Beijing, 100140

The CBRC Releases Notice on Adjusting Loan-to-Deposit Calculation Rules for Commercial Banks

Loan-to-deposit (LTD) ratio is a statutory regulatory indicator provided in the Commercial Bank Law. To adapt to a more diversified banking balance sheet structure and improve the regulatory framework, the CBRC, building on previous work, recently further improved the measures for improving LTD regulation. The Notice on Adjusting Loan-to-Deposit Calculation Rules for Commercial Banks was released, effective on 1 July 2014.

Experiences from at home and abroad demonstrate that LTD ratio has contributed a lot to managing liquidity risk, curbing rapid credit growth and stabilizing the banking sector. However, as commercial banks’ balance sheet structure and operation model are changing and financial market keeps evolving, the LTD regulation becomes limited in coverage and not sensitive enough to risks, and does not fully accommodate that banking assets, with different funding sources and investment, enjoy different duration and stability, thus unable to fully reflect the liquidity risks of banking sector.

The CBRC highly emphasizes the improvement of LTD ratio regulation. On one hand, it has been actively promoting the revision of Commercial Bank Law; on the other hand, it’s been constantly improving the calculation method of LTD ratio. For example, agro-related and MSE financial debts will not be considered loans into the calculation of LTD ratio. Since 2011, the CBRC has begun implementing monthly average daily LTD ratio. These measures have delivered results in promoting commercial banks to support the real economy and reducing deposit fluctuations. The LTD ratio of Chinese commercial banks was 65.9 percent by the end of March, down 0.18 percentage point compared with year beginning, well below the regulatory ceiling of 75 percent.

To improve the regulation of LTD ratio, the CBRC made the following changes to the calculation.

First, the previous calculation counted deposits and loans in both local and foreign currencies. But now it will only involve deposits and loans denominated in yuan. Deposits and loans in other currencies will be used as a monitoring indicator. This adjustment conforms to current laws and regulations and requirements for managing major currency liquidity risks set forth in Basel III and Rules on Liquidity Risk Management of Commercial Banks (Provisional). Meanwhile, regulatory arbitrage through currency conversion can be prevented by monitoring the LTD both in foreign and local currencies.

Second, the calculation no longer consider agro-related and MSE financial debts as loans. On top of that, there are three additional deductions. First, bonds issued by commercial banks with a remaining maturity period of no less than one year and no early redemption. Second, MSE loans. Third, loans extended by some commercial banks by using funds from international financial organizations or overseas governments. All the above-mentioned loans enjoy clear and stable funding sources, therefore no need for matching deposit.

Third, the calculation of deposits will incorporate two more items: first, negotiable certificates of deposits issued by banks to enterprises and individuals; second, foreign banks’ net deposits from their overseas parent banks with a maturity of over one year. The first category is a stable source of funding for banks. A considerable amount of capital of incorporated foreign banks comes from their parent banks, among which the net capital with over one year maturity will be counted as deposit, so as to help foreign banks to fully utilize this stable source of funding to expand their business and support the real economy in China.

This adjustment plan does not change the basic calculation method for LTD ratio and is easy to be implemented. The quantitative result demonstrates that the plan can help commercial banks devote more credit to supporting the real economy. The CBRC will monitor the impact of the changing LTD ratio calculation on banks’ business and the financial market. It will take prompt measures to prevent regulatory arbitrage against banks with big swings in their loan-to-deposit ratio. Meanwhile, according to the Rules on Liquidity Risk Management of Commercial Banks (Provisional), the CBRC will employ loan-to-deposit ratio, liquidity ratio, liquidity coverage ratio and multi-dimensional risk monitoring index to track and analyze banking liquidity risks and safeguard the soundness of the banking sector. In the mid to long term, the CBRC will actively promote the revision of the Commercial Bank Law by working with legislative authorities.


Rankings of regulatory issues highlighted by the European Chamber of Commerce in ChinaFigure 25 records a list of issues raised by the European Union Chamber of Commerce in China in its annual position paper, and shows the number of participants in the 2014 survey who ranked the issue.

For example, the foreign debt quota was highlighted by 30 banks and scored 9.17 out of 10. The three-year waiting period for an RMB license was a problem for 17 banks.

On 21 December 2014, the government announced that the three-year wait period for a new RMB license would be reduced to just one year, and removed the requirement that foreign banks applying for a license be profitable for two years before their application.

The adjacent table shows that 17 participants scored the three-year wait period at 7.71 in the survey and this change of policy will be well received by the foreign banks.

Many banks awarded a lower score to VAT reform, because they viewed it as a normal, if onerous, part of doing business.

The score for branch expansion was similar to 2013, while the score for ownership and scope for foreign banks versus domestic banks dropped from 7.1 in 2013 to 6.65 in 2014.

Figure 25: Participants’ scores for the regulatory issues raised by the EU Chamber

Issues raised by EU Chamber of Commerce in China

Score out of

10 Removal foreign debt quota (30) 9.17

Removal foreign guarantee quota (10) 8.70

Level of coordination by regulators, (PBOC, CBRC, etc.) (31)

8.42

Equal access/rights as domestic banks to the bond underwriting market (30)

8.40

Waive the 10% withholding tax on offshore funding (22)

8.05

Waive the 5% business tax on onshore and offshore lending (21)

7.90

Further review the LDR calculation (following recent changes) (17)

7.76

The three-year wait period for RMB (17) 7.71

Abolish the cost-based income taxation of rep offices (14)

7.36

VAT reform (20) 7.35

License approval process (29) 7.34Better communication of loan loss provisioning ratio (CBRC, MOF) (18)

7.28

Easier branch/outlet expansion (21) 6.86

Greater ownership and scope for foreign vs. domestic (23)

6.65

Source: European Union Chamber of Commerce in China in its annual position paper. Participants scored each factor on a scale of 1 to 10, 10 being the most important.


American Chamber of Commerce (AmCham) in China’s regulatory scorecard, April 2014Figure 26 outlines the progress made on key regulatory issues, as identified by AmCham in 2014.

It comments on the 20% investment ceiling for domestic banks, access to the bond market, and in the context of RMB internationalization, the China International Payments System. Further details on the AmCham review of the financial sector can be found in the appendices.

Figure 26: AmCham’s assessment of progress on key issues 2013

2013 recommendation 2014 recommendation

Commercial banking Raise and eventually eliminate the ceiling of ownership of foreign investors in local Chinese banks.

Low progress Raise the 20% investment ceiling imposed on foreign banks when investing in local Chinese banks, to incentivize foreign banks to transfer more of their expertise and best practices to their Chinese partners.

Credit rating N/A N/A Follow prevailing international practices, such as the IOSCO Code, and remove mandatory ratings requirements from relevant financial sector rules.

Interbank markets Further lift interbank limitations over foreign firms from the People’s Bank of China (PBOC) and the National Association of Financial Market Institutional Investors (NAFMII).

Low progress Further lift interbank limitations over foreign firms from the PBOC and the NAFMII.

Liquidity management N/A N/A Allow foreign banks to access the bond and certificate deposits (CD) markets for diversified sources of stable funding.

Private equity Keep the international “see-through” income taxes practice to avoid double taxation.

Moderate progress

Use “domestic in nature” treatment for foreign GP controlled RMB funds.

RMB internationalization

N/A N/A Release further information on the establishment of the China International Payment System.

Securities and bonds Grant SJVs business licenses related to innovative products more flexibly; shorten the grace period for securities JVs to get new licenses.

Moderate progress

More flexibly grant SJVs business licenses related to innovative products, and shorten the grace period for securities JVs to get new licenses.

Source: AmCham China 2014 White Paper Priority Recommendations Scorecard, April 2014


A deposit insurance scheme for ChinaIn the first half of 2014, various media reports suggested that the Chinese government planned to set-up a deposit insurance scheme during the year. It is widely expected that a deposit scheme will be launched before the PBOC dismantles the ceiling on deposit rates.

At the time of writing this report, it is thought that the scheme will be introduced in 2015. Whilst removal of the deposit rate cap is a key part of financial reform, it is understood that it will introduce uncertainty and volatility into the financial markets.

China remains the only significant world economy without deposit insurance. At the end of 2013, 112 countries out of 189 surveyed by the World Bank have explicit deposit insurance schemes.9

Expected impact of deposit insurance on foreign banksTen participants said a deposit insurance scheme would have a significant impact and two banks indicated it would have a very significant impact. In contrast, 24 banks suggested it would have an insignificant or no impact.

It is clear that those most impacted by a deposit insurance scheme will be foreign banks with a retail focus. A number of participants believe a deposit insurance scheme could be implemented before the end of 2014, but others felt it will be another one to two years before implementation.

Many participants were keen to understand whether a deposit insurance would apply to corporate deposits. While there was general consensus that this was an important step on the path to comprehensive financial reform, they acknowledged it will increase funding costs. They commented that any increase in costs would be difficult to pass onto clients.

Figure 27: Expected impact of a deposit insurance scheme on foreign banks

19 banks sayinsignificant impact


No impact

Insignificant

Very significant

Significant

9 Deposit Insurance Database, The World Bank, Development Research Group, June 2014

China is to adopt a deposit insurance scheme to better protect savers and free up interest rates

The Legislative Affairs Office of China’s State Council published a set of draft regulations containing 23 articles on its website on 30 November 2014 to solicit public opinion until 30 December 2014.

Financial institutions will be required to pay insurance premiums to a special fund and an agency will be set up to manage the money. Domestic banks’ overseas branches and foreign banks’ China branches are exempt. The fund will pay maximum compensation of 500,000 yuan (81,500 US dollars) per depositor if a bank suffers insolvency or bankruptcy.

The People’s Bank of China (PBoC), the country’s central bank, said 99.6 percent of Chinese depositors saved less than this sum. Banks will cover losses more than 500,000 yuan with their own assets, according to the regulations.

The new agency will make detailed rules on how to manage the fund and set insurance premium rate for different banks based on how riskily they run their business. Well-informed sources told Xinhua that the scheme will likely be implemented as early as at the beginning of 2015.

“The deposit insurance scheme is one important component of a financial safety net. Its purpose is to step up supervision of banks and prevent risks in the financial sector,” said the PBoC.

The scheme will significantly improve the competitiveness of medium and small-sized banks as the insurance will assure depositors of the safety of their savings, according to the central bank. “Therefore, it will help create a fair environment for all financial institutions,” said the PBoC.

Source: Xinhua, 30 November 2014


Liquidity managementLiquidity management is another issue many foreign banks in China are finding challenging.

Participants were asked to score the challenge of liquidity management during 2014 on a scale of 1 to 10. Figure 28 shows that only seven banks scored this issue below 5 on the scale. However, eighteen banks scored 8 or above and within this group, 9 banks assigned the maximum score. Some of the banks that registered lower scores also noted that liquidity had improved significantly in 2014 relative to 2013.

A large locally-incorporated foreign bank commented that deposits were stable but not growing significantly.

The large spikes in interest rates that were experienced in May 2013 and January 2014, have not been evident in the last nine months. This is illustrated in Figure 29, which records the overnight Shanghai Overnight Bank Offered Rate (SHIBOR) rate.

Figure 28: Liquidity management Figure 29: The overnight SHIBOR rate

Score on a 1 to 10 scale, 10 represents maximum impact

0

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4

6

8

10

1098765432


Numberof banks

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4 Oct

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4 Jan 2014

4 Feb 2

014

4 Mar

2014

4 Apr 2014

4 May

2014

4 Jun 2014

4 Jul 2014

4 Aug 2014

4 Sep 2014

4 Oct

2014

4 Nov 2014


Funding sources in 2014 and projections for 2017Thirty foreign banks provided details on their funding sources in 2014, and 28 banks were able to estimate percentages for 2017.

Figure 30 divides the banks into three categories – European, Asian, and North American – and shows heavy dependency on corporate deposits and interbank deposits, from both domestic and foreign banks. Only four retail banks revealed the extent of their retail deposit base, which accounted for up to 20% of total deposits.

The other category includes foreign banks offshore and China Foreign Exchange Trade System (CFETS), a division of the PBOC.

Figure 30: Funding sources in 2014 and 2017


Key:A - Asia headquartered banksE - Europe headquartered banksNA - North America headquartered banks

0 20 40 60 80 100

Unable to predict 2017

Unable to predict 2017

2017

20 40 60 80 100NA

NA

NA

NA

NA

NA

NA

E

E

E

E

E

E

E

E

E

E

E

E

E

E

E

A

A

A

A

A

A

A

A

NA

NA

NA

NA

NA

NA

NA

E

E

E

E

E

E

E

E

E

E

E

E

E

E

E

A

A

A

A

A

A

A

A

0

2014

OtherParentRetail deposits

Domestic banksForeign banks

Corporate deposits


Source: Wall Street Journal, 19 February 2014

China sets new rules for bank liquidity requirements follow three credit squeezes last year

China unveiled rules aimed at making sure banks keep on hand enough cash and other liquid assets after three credit squeezes hit the nation’s financial system last year.

The new rules, which will take effect 1 March, will put in place a new measurement system designed to help gauge the ability of the nation’s banks to resist short-term stress from credit shortages. They set minimum limits for holdings of cash and other assets that can easily be converted to cash.

The move by the China Banking Regulatory Commission comes after last year’s credit squeezes showed stresses in the financial system of the world’s No. 2 economy. The first of three credit squeezes emerged on the interbank market—where banks borrow and lend to each other to maintain liquidity—in June of last year. Some short-term interbank loan rates spiraled, unnerving investors.

“In June 2013, China’s interbank market figured a liquidity squeeze that was triggered by a number of external factors,” said the banking regulator in a statement, adding that some of the reasons were predictable while others weren’t. “This also exposed shortfalls in the liquidity risk management of commercial banks.”

The central bank stood on the sidelines for weeks before stepping in to ease conditions at the end of June. The move was widely seen by economists as a signal by the central bank to the country’s lenders to rein in excessive lending. It came amid rising concern inside and outside the country about rising debt and the potential for bad loans as China’s economic growth slows.

The new rules require banks to keep what is called a liquidity coverage ratio—a measurement comparing liquid assets to total net cash outflows over a 30-day period—at a level of 60% by the end of this year and at 100% by the end of 2018.

Banks currently aren’t subject to such a requirement.

The regulator said the calculation will include banks’ off-balance-sheet business, such as some wealth-management products. The products are popular high-yielding alternatives to standard bank deposits in China, but carry higher risk.

The regulations will apply to all domestic and foreign banks in China with assets of more than 200 billion yuan ($33.3 billion).

China’s interbank market experienced credit squeezes in June, October and December. The June crunch briefly sent the overnight interbank rate surging to 30% before the central bank stepped into the market to make additional funds available.


RMB internationalizationThe steady increase in RMB payments is illustrated in the SWIFT data for 2012 to 2014.

The number of financial institutions using RMB has increased by 44% in the Americas, by 22% in Asia-Pacific, by 47% in Europe, and by 83% in Africa and the Middle East. However, the use of RMB as a global payment currency is not widespread. In August 2014, RMB represented just 1.64% of world payment currencies, compared to 2.47% for the Japanese Yen and 43.82% for the US Dollar.

Figure 31: RMB as a world payment currency, August 2014

Figure 32: Growth in regional users of RMB payments sent and received directly with mainland China and Hong Kong

Source: SWIFT, RMB Tracker, September 2014

Source: SWIFT, RMB Tracker, September 2014

USD 43.82%

EUR 29.13%

GBP 8.4%

JPY 2.47%

CNY 1.64%

0

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& Midd

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ust 2

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ific, Aug

ust 2

014

+44%

+22%+47%

+83%70 101

411 501244 358

42 77

Number ofinstitutions

Growth of number ofinstitutions using RMB

Using RMBNot using RMB

America

s, Aug

ust 2

012


Stricter regulation of shadow bankingSeveral participants made reference to Document No. 107, issued by China’s State Council, which limits off-balance-sheet lending by banks, and more closely monitors non-bank financial institutions. While, as noted elsewhere in this report, foreign banks have no direct connection to shadow banking, they recognize that any deterioration in the general health of shadow banking will have an indirect impact on them.

Reference was also made to the Notice on Regulating Interbank Business of Financial Institutions (2014) No. 127, which was jointly issued by the PBOC, CBRC, CSRC, China Insurance Regulatory Commission (CIRC), and SAFE. This document regulates the interbank transactions of financial institutions. (A description of the document from the website of the People’s Bank of China.)

Source: http://www.pbc.gov.cn/image_public/UserFiles/english/upload/File/规范同业业务.pdf

Notice on regulating interbank business of financial institutions 2014 no.127

The PBC, CBRC, CSRC, CIRC and SAFE jointly issued the Notice on Regulating Interbank Business of Financial Institutions 2014 No.127 to further regulate the interbank transactions of financial institutions. In the premise of encouraging financial innovation and supporting the independent operation of financial institutions, and in line with the principle of closing side doors, opening front doors, strengthening management and promoting development, the Notice put forward 18 guidelines in regulating the behavior of interbank business, stepping up internal management and external regulations of interbank business, and promoting regulated innovation in asset and liability business.

The Notice defined and regulated every category of the interbank financing business, i.e. interbank lending, interbank deposit, interbank borrowing, interbank agent payment, repo and reverse repo. The financial institutions are required to divide their investment and financing oriented interbank business into the above-mentioned basic categories, and exercise category-specific management.

The Notice has strengthened internal and external management requirements for financial institutions in their interbank business, providing standard accounting and capital calculation requirements, establishing maturity and risk concentration requirements, and stressing the importance of more intensive liquidity management. Moreover, the Notice has opened the “front doors” for financial institutions to conduct interbank business in a regulated manner, supported financial institutions to expedite the development of asset securitization and actively participate in the pilot interbank CD program in order to make their asset and liability management more forward-looking, standardized and transparent.

Regulating the financial institutions’ interbank business is consistent with the overall requirements of the State Council of encouraging innovation, preventing risks, balancing the pros and cons, and seeking sound development, and will help maintain orders on the financial market, promote the healthy growth of interbank business, manage financial risks, and protect the legitimate rights and interests of financial consumers; this will also help channel more fund into the real sector, reduce financing cost for enterprises, and enhance financial sector’s capacity to support the real economy development; this will facilitate the rapid growth of a multi-tier capital market, increase the share of direct financing, and build the resilience of the financial sector and real sector; this will also help promote the implementation of credit policy, revitalize the stock of credit asset while making good use of the new loans, and support the adjustment and transformation of economic structure.

The PBC, CBRC, CSRC, CIRC and SAFE will cooperate and coordinate with one another more closely, unify regulatory standards, enhance supervision and oversight of the interbank business of financial institutions within their respective mandate and in the principle of combining institutional regulation and functional regulation, and impose strict penalty on misconduct that constitutes violation of laws and regulations, so as to promote the sound development of the financial industry.



05. Digitalization of China’s banking sectorA range of opinions surround the future digitalization of the Chinese banking sector.

While some participants were keen to point out that their focus on wholesale banking meant there was limited application, others viewed digitalization as a game changer for both retail and wholesale banking.

Some banks believe that e-channels will compensate for a limited branch network. Others commented that by offering wealth management services with strict “know your customer” (KYC) rules mean that face-to-face contact is still important. An Asian bank mentioned the ever present threat of fraud.

The entrance of new players, such as Alibaba and Tencent, into the digital banking arena was also recognized as a threat.

Several foreign banks highlighted the high investment costs associated with digitalization and their lack of scalability. A European corporate bank said that although it had numerous global platforms, it was difficult to gain the local regulator’s approval.

Digital developments


Developing digital initiativesOnly nine participants responded to a question on how they planned to introduce e-finance, mobile banking, and data analysis initiatives.

In the case of each initiative, the majority of participants said that any digital initiatives would be undertaken in-house, rather than by forging external alliances or making acquisitions. Respondents included foreign banks with both a retail and a wholesale focus.

Several foreign banks with a retail focus were unable to answer this question.

Frontrunner banks in the digital spaceSurvey participants were asked to nominate the domestic and foreign banks that they believed were most active in the move towards digital banking.

On the domestic front, they highlighted China Merchants Bank and China Minsheng Bank.

The foreign bank digital frontrunners mentioned by participants were Citibank, Standard Chartered Bank, Bank of East Asia, and HSBC.

Participants also projected that in the future, the Singaporean banks will leverage their domestic digital expertise in the China retail market.

Reasons to use digital marketing in 2014A small number of retail focused foreign banks provided insight into their current use of digital marketing.

The top five reasons these participants gave for their use of digital marketing are:

1. Acquisition of new customers

2. Serving existing customers

3. Reducing costs

4. Cross-selling to existing customers

5. Building brand awareness

Figure 33: Future digital initiatives

Mobile banking

Based on 6 responses

Data analytics


E-finance


AlliancesIn-house


Figure 34: Foreign banks using Sina Weibo

Note: *15 October 2014 ** 21 November 2013

2014 followers* Weibo posts

2013 followers** Weibo posts

Citibank 153,669 362 150,864 334

Dah Sing Bank 2,398 267 2,388 256

DBS 166,249 6,593 109,280 5,089

OCBC 20,748 998 N/A N/A

Rabobank 286 35 N/A N/A

Standard Chartered Bank 44,789 1,666 41,695 1,623

The Bank of East Asia 49,000 1,811 N/A N/A

Factors holding foreign banks back from digital marketingThe same group of retail focused foreign banks also ranked the factors that hold them back from transforming to digital channels. These are:

1. Legacy IT systems

2. Regulatory constraints

3. Slow acceptance in the marketplace

4. Small customer base

5. Unattractive products

Foreign banks use of social mediaThe banks were asked to comment on their use of social media to promote foreign bank services.

Five banks (all of which have retail operations) indicated that they use Sina Weibo. Sina Weibo is a micro–blogging site with similarities to both Twitter and Facebook. It is only active in Mainland China and some other Chinese speaking markets. By June 2014, it had 156.5 million monthly active users (MAUs), an increase of 30% over the figure in June 2013.

Tencent’s WeChat was launched in January 2011. As of August 2014, WeChat has 438 million active users, with 70 million outside China. Citibank continues to have the largest number of followers on Sina Weibo. However, the foreign banks appear to have seen only a minor increase in followers and posts over a 12 month period.

Source: Data recorded on Weibo pages of the respective banks



06. Performance and growth

Predictions on financial performance to 2017Foreign banks are optimistic about future performance. When asked about their own bank’s performance going forward to 2017, 20 banks responded that they predicted a slight improvement, while 18 banks hope to see a significant improvement. In last year’s survey, only seven banks predicted a significant increase.

None of the banks surveyed expect to see performance decline, although two banks expect it to remain the same. When asked to comment on foreign banks as a group, only one bank expected the group’s performance to decrease. Seven banks expect the status quo to remain, while 22 banks expect a slight increase and 10 banks a significant increase.

In last year’s report, only four banks forecast a significant increase for the group as a whole. These predictions suggest that the banks have lifted their expectations on future performance. This trend is linked to growth opportunities that will emerge if the financial reform process gains traction.

Figure 35: Predicted financial performance of foreign banks over the next three years to 2017

Increasesignificantly

Increaseslightly

Decreaseslightly

Staythe same


For foreign banks as a group

Increasesignificantly Increase

slightly

Staythe same


For participant’s foreign bank


Most important areas of growth in the last 12 monthsParticipants were asked to identify their three most important areas of revenue growth during the previous 12 months.

The two most important areas of revenue growth were trade finance followed by corporate lending.

In third place, well behind these two areas was treasury. In addition, seven participants mentioned cash management while five banks cited foreign exchange trading.

In addition to these key areas, participants also ranked the following within their top three. The list below is not in any specific order:

• Cross-border trade

• Cross-border funding

• Leveraging an international network

• SMEs lending

• Fee income

• Transition banking

• Wealth management

• Retail lending

• Aircraft and shipping finance

• Structured financing

• Commercial banking


Figure 36: Level of profitability of corporate banking business lines

Marginally profitableLoss

ProfitableVery profitable30% or more

0 5 10 15 20

Electronic banking

Rural banking

Structured lending

Property finance

Trade finance

Investment banking advisory

Infrastructure finance

Trading activities

Corporate banking

Commercial banking including SMEs

Number of banks reporting performance

Corporate banking profitabilityThree business lines stood out in participants’ responses on business lines and profitability. These are trade finance, corporate banking, and trading activities.

Banks have enjoyed a successful past year in trade finance. Twenty banks said this line had been profitable, 10 banks said very profitable, and 2 banks indicated returns exceeding 30%.

Corporate banking was deemed to be profitable by 18 banks, and very profitable by 9 banks.

Trading activities were profitable for 15 banks, very profitable for 8 banks and 1 bank had a return above 30%.

Investment banking advisory services, carried on by offshore arms of foreign banks, was also an attractive business line for eight banks. This is an area that is expected to grow as more Chinese corporates expand internationally.

Both trade finance and trading activities have seen significant increases in profitability compared to last year.


Retail banking profitability estimatesOnly eight foreign banks provided profitable performance data for their retail activities.

Figure 37 shows very little change in survey responses on retail banking profitability since the 2013 survey.

There has been some negative movement in profitability on both mortgages and credit cards since 2013; however, personal loans are performing well.

There has been an increase in the number of banks responding to the wealth management/private banking category in 2014.

Figure 37: Level of profitability of corporate banking business lines by number of respondents

LossMarginally profitable Profitable

Very profitable

30% or more

Retail banking – lending, deposit taking and transactional banking

2(2) 1(2) 2(3) 1

Secured lending – mortgages 1 3(1) 2(4)

Secured lending – vehicle and asset finance

1 2(1)

Unsecured lending – credit cards 2 1(1)

Unsecured lending – personal loans (1) 4 1(1)

Wealth (private banking) 4(1) 3(1) 1

Electronic banking - online offering (3) 1

Note: Figures from 2013 survey are shown in parentheses


Expected ROE for 2015 and three to five year projectionsOnly two banks expect a return on equity below 10%, in both 2015 and in three to five years.

Fourteen banks anticipate annual returns of 10%–12% in 2015, and 9 banks expect returns of 10%–12% in three to five years.

Eight banks expect returns of 13%–15% in 2015, and 11 banks expect the same returns in three to five years.

Six banks expect 16%–18% in 2015, and 8 banks 16%–18% in three to five years.

Three banks expect 19%–21% returns in 2015, while 4 banks expect 19%–21% in three to five years.

All North American participants anticipate returns of more than 13%–15% in three to five years, and only 1 records below 13%–15% in 2015.

Six Asian banks and 5 European remain at the 10%–12% level or below in three to five years.

Another question asked the participants to comment on their Return on Assets (ROA) for 2015 and to give their three to five years projections.

Twenty banks provided forecasts on their ROA for 2015 and over the next three to five years. Three banks expect an ROA of 0.5%–0.8% in 2015 and 0.5%–08% in three to five years.

Seven banks anticipate 0.8%–1.1% in 2015, and the same in three to five years, while 5 banks expect 1.1%–1.4% in 2015 and three to five years.

Expe

cted

RO

E in

201

5

Expected ROE in 3 to 5 years

Asian banks (10) < 10% 10%–12% 13%–15% 16%–18% 19%–21%

< 10% 2 1(2)

10%–12% 3(2) 1(2) (1) 1

13%–15% (2) 1

16%–18% 1 (1)

19%–21%

European banks *(18) < 10% 10%–12% 13%–15% 16%–18% 19%–21%

< 10% (2) (1)

10%–12% (1) 4(1) 3(2) 1

13%–15% 1 3(4) 1(2)

16%–18% 3(4)

19%–21% 2(2)

North American banks (6) < 10% 10%–12% 13%–15% 16%–18% 19%–21%

< 10% (1)

10%–12% 1 (1)

13%–15% 1 1

16%–18% 1 1(1)

19%–21% 1(2)

Figure 38: ROE projections for three to five years by number of respondents

Note: Figures from 2013 survey are shown in parentheses


Another question asked the participants to comment on their return on assets (ROA) for 2015 and to give their three-to-five year projections.

Twenty banks provided forecasts on their ROA for 2015 and over the next three to five years. Three banks expect an ROA of 0.5%–0.8% in 2015 and 0.5%–0.8% in three to five years.

Seven banks anticipate 0.8%–1.1% in 2015, and the same in three to five years, while 5 banks expect 1.1%–1.4% in 2015 and three to five years.

Figure 39: Expected ROA for 2015 and in three to five years’ time

Expe

cted

RO

A

in 2

015

Expected ROA in 3 to 5 years

All banks (16) 0.5%–0.8% 0.8%–1.1% 1.1%–1.4% 1.4%–1.7%

0.5%–0.8% 3(1) (2) 1(1)

0.8%–1.1% 7(5) 1(1) 1

1.1%–1.4% 5(3)

1.4%–1.7% 2(3)


Future growth opportunitiesFigure 40 examines nine different product lines to identify the growth opportunities for foreign banks over the next three years.

The central zero axis places banks that projected a product line to increase slightly and increase significantly on the right side of the axis, and those that predicted it would stay the same or decrease on the left side.

Four factors record “increase significantly” scores. These are leveraging the international network, trade finance, cash management, and treasury and corporate loans.

Sixteen banks expect SFTZ related opportunities to increase, while 11 banks expect increases in digital banking.

Only four banks suggest digital banking will increase significantly.

Figure 40: Future growth opportunities

0 5 10 15 20 25 305

Decrease slightlyDecrease significantly

Stay the sameIncrease slightlyIncrease significantly

Digital banking

International network

Corporate loans

Trade finance

Project finance

Cash management/treasury

Corporate advisory

SFTZ related

SMEs/commercial

Number of banks ( Increase significantly)


Revenue growth for individual participantsThirty-four banks provided indications of revenue growth in 2014 and for 2017.

One bank had zero growth and 1 bank had a 20% decline in 2014. Five banks had 10% growth in 2014 and 2017.

At the high-end, 13 banks expect growth of 20% or more in both 2014 and 2017. This year’s projections include two banks at 100%, 1 at 60%, and 4 at 30% growth. There are some similarities with the projections made in the 2013 report. In 2013, 13 banks projected revenue growth for 2016 of 20% or higher.

In 2013, three banks expected growth of just 5%, and 2 banks predicted zero growth.

Figure 41: Revenue growth projections for 2014 and 2017 Figure 42: Revenue growth projections for 2013 and 2016

-20-10

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revenue growth in 2013

%

%


Margin compressionWithin the group of 35 respondents, only 1 bank said it had not experienced margin compression. This respondent said all its lending was in US dollars. Thirteen banks described margin compression as moderate, and 5 banks said it was extensive.

A European bank said it had experienced margin compression on loan rates but not on deposits. Another European bank said that it had been forced to offer higher rates for structured deposits sourced from “good” clients.

An Asian bank commented that margin compression will become a more critical issue for foreign banks providing RMB mortgages, particularly if and when deposit rates are liberalized. Another Asian bank commented that, in general, funding costs were rising. A European bank indicated that it had anticipated greater pressure on margins this year; however, at this stage they had ample liquidity.

Figure 43: Degree of margin compression Figure 44: Deposit rates showing the removal of the lending rate floor in 2013 while the deposit rate restrictions remain in place

Source: CEIC and BBVA research

Extensive

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Lending rate benchmarkLending rate lower boundDeposit rate upper boundDeposit rate benchmark

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07. Product and segment developments

Products in demandThe participants were provided with separate lists of different retail and corporate banking services. They were asked to rank the three services from each group that they believe will increase in importance for foreign banks by 2017.

Retail productsThe retail products that are expected to be in greatest demand by 2017 are mobile banking, private banking/wealth management, and investment products. These products are followed by credit cards and mortgages. This ranking is in line with last year’s findings, although mortgage products, which remain in fifth place, has increased its score.

Figure 45: Retail products future demand

Product bubbles represent relative levels of predicted future interest

Private banking/wealth management

Otherretail

products

Mortgages

Mobile banking

Investment productsCredit cards -proprietary


Corporate productsIn corporate banking, debt capital markets were expected to be in greatest demand by 2017. These were followed by securitization, asset-backed services, and cross-currency swap products.

Cross-currency swaps in this year’s report have moved ahead of interest rate swaps and structured products.

Wealth managementSeveral participants expressed optimism over the future growth potential of the wealth management sector.

One bank commented that this market segment is being serviced by its offshore unit, while another noted that its wealth management business model was still limited because its product line is not yet complete.

An active player in the HNWIs segment suggested there had been a rebound in 2014, and personal wealth was growing again.

Key challenges in wealth managementThe main challenges identified in serving the domestic wealth management sector included:

• Limited distribution

• An immature market that needs education

• Incomplete product line

• Highly competitive product offerings

• Many grey areas of regulation that prevent foreign bank involvement

• Customer backlash if returns not accomplished

• Difficulties in hiring

• Foreign exchange controls

Figure 46: Corporate products future demand

Product bubbles represent relative levels of predicted future interest

Structured products

Securitization

Projectfinancing

Other

Leasing

Interest rateswaps

Equitycapital

Debt capital markets

Cross-currency swaps

Creditderivatives

Asset-backedsecurities

Privateequity

Hybridproducts

Onlinetransactions


China is growing number of millionaires

By the end of 2013, the number of millionaires (defined as individuals with personal wealth of RMB10 million, equivalent to US$1.6 million and GBP1 million) in China’s 31 provinces, municipalities, and autonomous regions, apart from Hong Kong, Macao, and Taiwan, reached 1,090,000 - an increase of 40,000 from the previous year, or an increase of 3.8%. Among those figures, the number of super-rich (defined as individuals with personal wealth of RMB100 million, equivalent to US$16 million and GBP10 million) has already reached 67,000, an increase of 2,500 people within the last year, or a 3.7% rise. Last year, the rate of growth of millionaires and super-rich in China was at its lowest point in the last five years.

Nonetheless, this year’s figures have improved. The Hurun Research Institute has predicted that in the next three years, the number of millionaires could reach 1,210,000 people and similarly, the number of super-rich could increase to 73,000.

Chinese millionaires can be divided into 4 categories: private business owners, professional stock market investors, real estate investors, and high-salaried executives. The number of professional stock market investors decreased whereas private business owners increased by 5%. Chinese super-rich can be divided into 3 categories: private business owners, real estate investors, and professional stock market investors.

Source: The Hurun Research Institute, 2014


Customer segments: future opportunities for growthFigures 47 and 48 show the level of interest held by foreign banks in six different market segments. This year’s scores are shown alongside scores from last year’s report.

Participants were asked to score their level of interest in each segment on a scale of 1 to 10, where 10 represents maximum interest.

SOEsTwenty-eight banks scored the SOE market segment 7 or higher, with 9 banks assigning it the maximum score of 10.

POEsTwenty banks scored the POE market segment 7 or higher in 2014, compared with 10 banks in 2013.

At the other end of the scale, eight banks attributed scores of 5 or lower for the POE market, suggesting they had little interest in this segment.

Figure 47: Importance placed on the SOE market Figure 48: Importance placed on the POE market

0

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4

6

8

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10987654321

Numberof

banks

20142013

Based on responses from 37 banks in 2014and 34 banks in 2013

Scores ( Increase significantly)

0

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Numberof

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20142013

10987654321


Scores ( Increase importance)


SMEsForeign banks are divided on the importance of the SME market, with some clearly targeting SMEs and others showing little to no interest in this segment.

Results for the SME segment show an increase in interest since 2013. Four banks assigned the maximum score of 10, while a further 3 banks scored 8. At the opposite end of the scale, ten banks scored this segment 3 or below in 2014 compared to just 4 banks in 2013.

Financial institutionsAlmost all foreign banks view domestic financial institutions as a key target. Eighteen, or half the respondents to this question, scored domestic financial institutions 8 or higher.

Figure 49: Importance placed on the SME market Figure 50: Importance placed on the financial institutions market

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Global corporatesGlobal corporates are also an attractive target for foreign banks, 18 banks assigned this segment 8 or higher, while 9 banks scored it a 10.

Only six of the 36 respondents scored this market 5 or below.

HNWIsJust 20 banks recorded their interest in the HNWIs segment. Twelve banks scored 7 or above in both 2013 and 2014.

Figure 51: Importance placed on the global corporates market

Figure 52: Importance placed on the HNWIs market

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In 2014, when asked if foreign banks’ interest in investing in domestic banks had declined, 34 banks responded “Yes” as compared to 29 banks in 2013. Four banks responded “No” in 2014, while a further 3 banks said they did not know.

As in 2013, participants this year indicated that foreign banks need to be able to acquire more than 50% shareholding to reignite their interest in this market.

One Asian bank stated that the current 20% model no longer works. They suggested that if some mid-sized banks were to fail, this rule might be relaxed.

Chinese banks’ acquisition of banks overseas, and licenses for new private banks and internet banks, may pave the way for a more relaxed approach by the regulator.

Thirty-four banks believe the asset ceiling should be lifted.

Participants were also asked to suggest other areas of the financial sector that might offer future potential for foreign banks.

The participants mentioned interest in the following parts of China’s evolving financial environment:

• Commodities

• Leasing

• Hedging for Chinese corporates overseas

• Rural banking

• Factoring

• Securities

• Asset management

• Derivatives trading

• Trade finance

• Syndicated loans, and

• The bond market

Figure 53: Appetite for investing in domestic banks Figure 54: Removal of the foreign ownership ceiling


Yes, less appetite

Not lessappetite

Don’t know

2014

2013

YesNo


34 banks believethe 20% ceilingshould be lifted

Interest in investing in domestic banks and other parts of the financial sector



08. Human resource developments

Personnel most in demand at foreign banksThe three staff functions in greatest demand were identified as relationship bankers in the corporate environment, compliance and legal personnel, and risk management personnel. These key positions were followed by credit management personnel.

In 2013, trade finance personnel were in fourth position, However, in 2014 they dropped to eighth position. This report finds that trade finance has been a key area of revenue growth over the last 12 months.

Relationship bankers in the SME segment have dropped from sixth place in 2013 to 13th place in 2014. This suggests that going forward, this segment may be less important.

Finally, demand for branch personnel also appears less urgent, perhaps reflecting a declining interest in expanding branch networks.

Figure 55: Positions in high demand

personnel

Creditmanagement

personnelRelationship

bankers-financialinstitutions

Risk management

Compliance and legalpersonnel

Relationshipbankers-corporate

Bubbles represent relative levels of predicted future interest

Figure 56: Positions in high demand in 2013 and 2014

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Big data/data analytics

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retail

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anagement perso

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corporate


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2013



39 banks willincrease salaries

in 2014


Salary increasesThis year’s salary increase estimates ranged from zero to 10% with most participants selecting an increase of 8%. In last year’s survey, four banks indicated a salary increase greater than 10%.

At the low end of the scale, 14 banks estimated they had increased salaries by 5% or less. In 2013, 11 banks fell within this range.

Participants estimated that salaries will increase 8% in 2014 at foreign banks across the board.

Figure 57: Salary increases in 2014 compared to 2013 for participant’s bank only

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Figure 58: Salary increases in 2014 Figure 59: Salary increases in 2014 compared to 2013 for foreign banks as a group

12%10%

9%

8%

7%

4%

6%

5%

3%

2013

2014

Based on responses of 31 banks in 2014 and 32 banks in 2013


Support levelsMiddle managementSenior management

Based on 27 banks’ responses for senior management and 23 banks for middle management and support levels in 2013 survey

Below

EqualAbove

Below

Equal

Above

Below

EqualAbove

Foreign bank salaries compared to domestic bank salariesThe participants believe that salary levels for foreign bankers are higher than those for domestic bankers. These findings closely match those in last year’s survey.

At the middle management level, the majority of participants believe that foreign and domestic bank salaries are comparable. Just over one-third believe salaries at foreign banks are higher.

At the support level, 42% think salaries at foreign banks are higher and 39% think they match domestic banks. In 2013, participants believed that foreign bank salaries exceeded those of domestic banks at all three levels.

Figure 60: Perceptions on salaries at foreign banks versus domestic banks in 2014

Figure 61: Perceptions on salaries at foreign banks versus domestic banks in 2013

Below

Equal

Above

Support levelsMiddle managementSenior management

Based on 37 banks’ responses for senior management and middle management and 38 banks for support levels

Below

Equal

Above

Below

Equal

Above


Staff turnoverParticipants predicted that the level of staff turnover will decline this year. While four banks predicted an increase, 10 banks expected to see turnover rates decline.

Eleven banks anticipated turnover rates to be between 10% and 14% in 2014, while 16 banks expected turnover rates below 10%.

At the top-end of the scale, eight banks, including a number of retail oriented participants, expect staff turnover to fall in the 20% to 30% band.

In 2013, 18 banks predicted turnover rates above 15%, while this year only 12 banks are expected to exceed 15%.

Figure 62: Staff turnover to decline in 2014

Figure 64: Foreign bank turnover rates in 2013 and 2014 (both figures provided in 2014)

Figure 63: Staff turnover in the foreign bank sector as a group

10 banks expectstaff turnover

to drop

Four banksexpect it to rise

12%10%

9%

8%

7%

4%

6%

5%

3%

2013

2014

Based on responses of 31 banks in 2014 and 32 banks in 2013

2013

2014

6 9 79 7 1

6 10 411 8

Percentage of turnover rates

Number of banks are shown in each category based on 39 banks turnover rates in 2013 and projected for 2014

< 5% 5 to 9% 10 to 14% 15 to 19% 20 to 29% > 30%



09. Research methodology

This report is based on interviews with 41 banks based in Shanghai, Beijing, and Hong Kong, conducted during August and September 2014.

The contents of these individual bank discussions are confidential and therefore, findings are presented in a group format. The 41 participating banks are listed below. National Bank of Egypt is the only African bank branch in China and therefore, has not been categorized under any regional groups below.

Asian banks European banks North American banks

ANZ* Banco Santander Bank of America Merrill Lynch

Bangkok Bank Barclays Bank Bank of MontrealBank of East Asia BBVA Bank of Nova ScotiaCommonwealth Bank of Australia*

BNP Paribas S.A. Citibank

Dah Sing Bank Commerzbank JPMorgan Chase BankHang Seng Bank Crédit Agricole Royal Bank of CanadaMaybank Credit Suisse Wells Fargo BankMizuho Bank Deutsche BankNational Australia Bank* HSBCOCBC ING BankUOB Intesa Sanpaolo BankWestpac* KBC Bank

Landesbank Baden WurttemburgNatixisNorddeutsche Landesbank

NordeaRabobankRaiffeisen Bank InternationalSociété GénéraleStandard Chartered BankVTB

* ANZ Banking Group, Commonwealth Bank of Australia, National Australia Bank, and Westpac are Australian banks and have been grouped with the Asian banks.



10. Co-author of the reportDr. Brian Metcalfe is an Associate Professor in the Goodman School of Business at Brock University, Ontario, Canada. He has a doctorate in financial services marketing and has researched and produced many reports on behalf of accounting and management consulting firms in 14 different countries including Canada, Australia, China, India, Japan, and South Africa.

He has consulted for a wide range of organizations including Royal Bank of Canada, Scotiabank, Barclays Bank, Sun Life Insurance Company, Equitable Life of Canada, and several major consulting firms.

He has also taught an executive management course entitled “Financial Services Marketing” in the Graduate School of Business at the University of Cape Town.

Appendices


Appendix ALocally-incorporated foreign banks in China

Allied Commercial Bank JPMorgan Chase Bank (China) Company Limited

Australia and New Zealand Bank (China) Company Limited KEB Bank (China) Co., Ltd.

Bangkok Bank (China) Company Limited Kookmin Bank (China) Limited

Bank of Montreal (China) Co., Ltd. Metrobank (China) Co., Ltd.

Bank of Tokyo-Mitsubishi UFJ (China), Ltd. Mizuho Bank (China) Ltd.

Bank SinoPac (China) Ltd. Morgan Stanley Bank International (China) Limited

BNP Paribas (China) Limited Nanyang Commercial Bank (China) Limited

Chinese Mercantile Bank OCBC Bank (China) Limited

Citibank (China) Co., Ltd. The Royal Bank of Scotland (China) Co., Ltd.

CITIC Bank International (China) Limited Shinhan Bank (China) Limited

Concord Bank Société Générale (China) Limited

Credit Agricole CIB (China) Ltd. SPD Silicon Valley Bank

Dah Sing Bank (China) Limited Standard Chartered Bank (China) Limited

DBS Bank (China) Limited Starbright Finance Co., Ltd.*

Deutsche Bank China Co., Ltd. Sumitomo Mitsui Banking Corporation (China) Limited

East West Bank (China) Limited The Bank of East Asia (China) Limited

Fubon Bank (China) Co., Ltd. UBS (China) Limited

GE Capital Finance (China) Co., Ltd. United Overseas Bank (China) Limited

Hana Bank (China) Company Limited Wing Hang Bank (China) Limited

Hang Seng Bank (China) Limited Woori Bank (China) Limited

HSBC Bank (China) Company Limited Zhengxin Bank Company Limited

Industrial Bank of Korea (China) Limited

Source: The information is accumulated based on various sources and may have changed since the preparation of this report.

* Starbright Finance Co., Ltd. is part of Nomura Bank International.


Appendix BParticipating foreign banks showing country or territory of origin

Country/territory Bank CityAustralia ANZ ShanghaiSpain Banco Bilbao Vizcaya Argentaria Hong KongSpain Banco Santander ShanghaiThailand Bangkok Bank ShanghaiUSA Bank of America Merrill Lynch ShanghaiHong Kong Bank of East Asia ShanghaiCanada Bank of Montreal BeijingCanada Bank of Nova Scotia Hong KongUK Barclays Bank ShanghaiFrance BNP Paribas ShanghaiUSA Citibank ShanghaiGermany Commerzbank ShanghaiAustralia Commonwealth Bank of Australia ShanghaiFrance Crédit Agricole ShanghaiSwitzerland Credit Suisse BeijingHong Kong Dah Sing Bank ShenzhenGermany Deutsche Bank ShanghaiHong Kong Hang Seng Bank ShanghaiUK HSBC ShanghaiNetherlands ING Bank ShanghaiItaly Intesa Sanpaolo Bank ShanghaiUSA JPMorgan Chase Bank BeijingBelgium KBC Bank ShanghaiGermany Landesbank Baden Wurttemberg ShanghaiMalaysia Maybank ShanghaiJapan Mizuho Bank ShanghaiAustralia National Australia Bank ShanghaiEgypt National Bank of Egypt ShanghaiFrance Natixis ShanghaiGermany Norddeutsche Landesbank ShanghaiSweden Nordea ShanghaiSingapore OCBC ShanghaiNetherlands Rabobank ShanghaiAustria Raiffeisen Bank International BeijingCanada Royal Bank of Canada BeijingFrance Société Générale ShanghaiUK Standard Chartered Bank Shanghai

Singapore United Overseas Bank Shanghai

Russia VTB ShanghaiUSA Wells Fargo Bank ShanghaiAustralia Westpac Bank Beijing


Appendix CThe Top 100 banks in China ranked by Tier 1 capital showing foreign bank ownership relationships

Source: The Banker, July 2014 for rankings. Individual bank data on foreign bank shareholdings.

Rank Bank Tier 1 Capital Assets

Rank (by assets) Foreign bank shareholder

1 ICBC 207,614 3,100,254 12 China Construction Bank 173,992 2,517,734 23 Bank of China 149,729 2,273,730 44 Agricultural Bank of China 137,410 2,386,447 35 Bank of Communications 68,333 976,882 5 HSBC6 China Merchants Bank 41,690 658,210 77 China Citic Bank 37,427 596,721 10 BBVA (sold 5.1%, 9.9%

remaining)8 Shanghai Pudong Development Bank 34,042 603,101 89 China Minsheng Bank 33,232 528,714 1110 Industrial Bank 32,965 602,661 9 Hang Seng Bank11 China Everbright Bank 24,766 395,786 1212 Postal Savings Bank of China 22,981 913,545 613 Ping An Bank 16,414 310,020 1314 Hua Xia Bank 14,066 274,082 14 Deutsche Bank15 Bank of Beijing 12,825 219,070 16 ING Bank16 China Guangfa Bank 11,869 240,880 15 Citigroup (formerly Guangdong

Development Bank)17 Bank of Shanghai 9,178 160,230 17 Banco Santander (8% in 2014

from HSBC)18 Bank of Jiangsu 7,805 125,079 1919 Chongqing Rural Commercial Bank 5,948 82,269 2120 Shanghai Rural Commercial Bank 5,386 68,976 27 ANZ Bank21 Evergrowing Bank 5,182 125,901 18 UOB22 Huishang Bank 5,155 62,620 2923 China Zheshang Bank 4,596 79,993 2224 Guangzhou Rural Commercial Bank 4,473 62,056 3025 Bank of Nanjing 4,379 71,134 25 BNP Paribas26 Bank of Ningbo 4,165 76,659 23 OCBC27 China Bohai Bank 3,957 93,119 20 Standard Chartered Bank28 Shengjing Bank 3,520 58,243 3129 Beijing Rural Commercial Bank 3,477 76,367 2430 Bank of Hangzhou 3,360 55,750 32 CBA31 Chengdu Rural Commercial Bank 3,301 70,357 2632 Harbin Bank 3,256 52,798 3333 Bank of Tianjin 3,156 66,484 28 ANZ Bank34 Bank of Kunlun 2,846 40,389 3835 Bank of Jilin 2,625 42,977 3536 Bank of Chengdu 2,519 42,818 3637 Shunde Rural Commercial Bank 2,506 30,791 4238 Bank of Suzhou 2,456 26,870 4639 Tianjin Rural Commercial Bank 2,317 34,281 3940 Bank of Chongqing 2,193 33,888 40 Dah Sing Bank41 Hankou Bank 2,180 29,207 4442 Bank of Dalian 2,065 46,548 3443 Bank of Jinzhou 1,885 29,479 4344 Jiangnan Rural Commercial Bank 1,827 27,093 4545 Shenzhen Rural Commercial Bank 1,807 22,932 5146 Bank of Dongguan 1,765 26,831 4747 Xiamen International Bank 1,749 42,746 3748 Wuhan Rural Commercial Bank 1,661 21,357 5549 Bank of Zhengzhou 1,537 24,473 4950 Bank of Nanchang 1,531 20,818 58


Rank Bank Tier 1 Capital Assets

Rank (by assets) Foreign bank shareholder

51 Huarong Xiangjiang Bank 1,523 24,272 5052 Hangzhou United Rural Commercial

Bank 1,499 16,816 67 Rabobank

53 Bank of Changsha 1,495 31,688 4154 Bank of Hebei 1,483 24,982 4855 Qingdao Rural Commercial Bank 1,456 20,587 5956 Zhejiang Chouzhou Commercial Bank 1,429 17,554 6357 Bank of Lanzhou 1,340 20,549 6058 Bank of Qingdao 1,331 22,237 52 Intesa Sanpaolo59 Bank of Taizhou 1,321 14,374 7360 Bank of Guiyang 1,321 20,083 6161 Bank of Zhuhai 1,254 21,235 5762 Bank of Luoyang 1,245 16,016 6963 Guangdong Nanyue Bank 1,205 21,560 5464 Guangxi Beibu Gulf Bank 1,205 15,010 7165 Jinshang Bank 1,204 21,597 5366 Bank of Inner Mongolia 1,189 10,703 9267 Bank of Ningxia 1,180 13,058 7768 Fudian Bank 1,145 19,831 6269 Bank of Wenzhou 1,096 17,053 6570 Nanchong City Commercial Bank 1,091 21,322 5671 Tianjin Binhai Rural Commercial Bank 1,041 14,412 7272 Fujian Haixia Bank 1,001 13,824 7573 Changshu Rural Commercial Bank 987 13,834 7474 Bank of Yingkou 973 11,692 86 CIMB75 Bank of Liaoyang 968 9,915 9676 Bank of Rizhao 961 10,598 9377 Yinzhou Bank 951 12,605 7978 Bank of Weifang 925 10,548 9479 Jiangsu Zhangjiagang Rural

Commercial Bank 920 11,882 84

80 Qilu Bank 918 15,405 70 CBA81 Jiangsu Jiangyin Rural Commercial

Bank 895 12,466 81

82 Laishang Bank 887 8,404 10183 Bank of Anshan 882 11,200 8884 Zhejiang Mintai Commercial Bank 877 12,017 8285 Bank of Fuxin 854 11,157 8986 Weihai City Commercial Bank 837 16,672 6887 Wuxi Rural Commercial Bank 832 13,728 7688 Urumqi City Commercial Bank 828 11,949 8389 Chongqing Three Gorges Bank 824 12,579 8090 Guilin Bank 819 17,052 6691 Guangdong Huaxing Bank 782 8,504 10092 Wujiang Rural Commercial Bank 771 10,240 9593 Bank of Ganzhou 745 11,074 9094 Zhejiang Tailong Commercial Bank 731 12,731 7895 Jilin Jiutai Rural Commercial Bank 725 9,048 9996 Xiamen Bank 718 17,330 64 Fubon Bank (HK)97 Bank of Handan 687 11,880 8598 Zijin Rural Commercial Bank 685 9,893 9799 Bank of Liuzhou 673 11,481 87100 Xinhui Rural Commercial Bank 662 6,129 109


Appendix DForeign banks, with shareholdings in domestic banks, showing 2013 Tier 1 domestic bank ranking in China

2013 Tier 1 rankings based on the The Banker, July 2014

Foreign bank Domestic bank Tier 1 rank in China

ANZ Bank Bank of Tianjin 33

ANZ Bank Shanghai Rural Commercial Bank 20

Banco Santander Bank of Shanghai 17

Bank of Nova Scotia Bank of Xian N/A

BBVA China Citic Bank (to be sold) 7

BNP Paribas Bank of Nanjing 25

CBA Bank of Hangzhou 30

CBA Qilu Bank 80

CIMB Bank of Yingkou 77

Citigroup China Guangfa Bank 16

Dah Sing Bank Bank of Chongqing 40

Deutsche Bank Hua Xia Bank 14

Fubon Bank (HK) Xiamen Bank 96

Hang Seng Bank Industrial Bank 10

Hang Seng Bank Yantai Bank N/A

HSBC Bank of Communications 5

ING Bank Bank of Beijing 15

Intesa Sao Paolo Bank of Qingdao 58

Morgan Stanley Nan Tung Bank N/A

OCBC Bank of Ningbo 26

Rabobank Hangzhou United Bank 52

Standard Chartered Bank China Bohai Bank 27

UOB Evergrowing Bank 21


Appendix E AmCham China White Paper on Financial Services 2014

IntroductionAmCham China believes that regulatory reform in China’s capital markets is an important key to the new administration’s economic reforms and Chinese firms’ global expansion. Foreign-invested financial entities can positively contribute to these reforms by sharing global best practices and increasing healthy competition.

AmCham China applauds the State Council’s July 2013 decision to prioritize interest rate liberalization and reform the credit structure and the People’s Bank of China’s (PBOC) subsequent announcement to remove the lending rate floor. We also welcome the State Council’s approval of the China (Shanghai) Pilot Free Trade Zone (Shanghai FTZ) in September 2013, in conjunction with further reforms in the financial services sector. We believe the Shanghai FTZ will support nationwide financial sector reforms that will eventually facilitate another round of domestic economic growth.

We additionally are pleased to see that during the 2013 Strategic and Economic Dialogue, the US and Chinese sides both agreed to resume negotiations on a Bilateral Investment Treaty. We believe the proposed pre-establishment national treatment and negative list approaches can effectively promote open trade between the two countries. We encourage China to highlight the financial services industry in the subsequent negotiation process.

Other positive developments in 2013 include the following:

• The China Banking Regulatory Commission (CBRC) announced plans to establish a deposit insurance system and exit mechanism for insolvent banks.

• The State Administration for Foreign Exchange launched a foreign currency cash pooling program and accelerated RMB Qualified Foreign Institutional Investors (RQFII) approvals.

• The China Securities Regulatory Commission (CSRC) unveiled an initial public offering reform plan, which can serve as a major step toward introducing a new system of registration, and granted foreign banks mutual fund distribution qualifications.

As China continues to push forward market-oriented reforms and expand its international footprint, the financial services industry will play an increasingly prominent role. AmCham China encourages a more accelerated pace of reform in this sector.

Sector Developments and Ongoing ConcernsRMB InternationalizationAmCham China understands that currency internationalization involves a demanding process of risk mitigation and control. China also faces unprecedented challenges in governing cross-border transactions. Despite these challenges, RMB internationalization made significant progress in 2013, due in part to government policies.

According to the most recent statistics provided by the Society for Worldwide Interbank Financial Telecommunication and the Bank for International Settlements, RMB usage in traditional trade finance—Letters of Credit and Collections—grew from an activity share of 1.89 percent in January 2012 to 8.66 percent in October 2013, propelling the RMB to the second most used currency in this market, overtaking the Euro and ranking behind only the USD. The RMB is also now the world’s ninth most actively traded currency. As of October 2013, the RMB remained stable in its position as the twelfth most frequently utilized payments currency.

In 2013, the PBOC, CBRC, CSRC, and the China Insurance Regulatory Commission (CIRC) put forward several industrywide reforms, including some through the FTZ. These reforms include the PBOC circular on “Qualified Foreign Institutional Investors’ Investment on the Interbank Bond Market,” the PBOC Circular on “Further Promoting Interest Rate Liberalization,” the PBOC’s “Opinions on Leveraging the Role of Finance in Supporting the Construction of the China (Shanghai) Free Trade Zone,” and the ongoing discussion between the CSRC and the Hong Kong Securities and Futures Commission on “Mutual Recognition for Cross-border Fund Operations between Hong Kong and mainland China.”

Despite these advances, China still does not have a secure, efficient, and resilient system of payment and settlement that would facilitate RMB internationalization. AmCham China is willing to support the acceleration process of RMB internationalization by discussing and sharing best practices and experiences with China’s financial regulators. Although the strategic initiatives of the Shanghai FTZ will further accelerate this process, AmCham China suggests extending piloting business to foreign commercial banks in addition to the designated Chinese commercial banks.


Commercial BankingIn 2013, all banks operating in China experienced challenges stemming from the slowdown of the Chinese economy, the introduction of many new regulations, increased competition, the entry of internet companies into traditional banking services, and the increased pace of market liberalization.

While the latest CBRC statistics show that foreign banks hold only 1.93 percent of total industry assets, most foreign commercial banks still value the Chinese market and continue to explore business models and products that fit with the Chinese market and their market position.

AmCham China welcomes actions taken by the Chinese government in 2013 to further liberalize and deepen financial markets, such as removing the lending rate ceiling, launching certificates of deposit, expanding the long-term debt quota pilot project, allowing RMB two-way cashing pooling, increasing the RQFII quota, allowing more foreign banks to issue credit cards, and giving licenses to distribute mutual funds to some qualified foreign banks. Moreover, in its annual year-end work conference, the CBRC said it will lower the requirements for foreign banks to enter, conduct RMB business, and on working capital for bank branches, while further supporting banking reform in the Shanghai FTZ and other pilot financial reform zones. Regulators have also remained vigilant against financial risks by increasing oversight of shadow banking activities and enhancing financial consumer protection.

AmCham China welcomes these policy developments and believes their implementation will foster the emergence of a vital and healthy Chinese banking industry. Our members have a strong interest in partnering with Chinese banks as they endeavor to develop international networks, to help China advance its financial systems.

The PBOC and CBRC are developing Deposit Insurance and Recovery and Resolution regulations, which will have a profound impact on the capital requirements and daily operations of banks. AmCham China member banks request more transparency in the drafting process of these regulations.

Foreign banks should be able to obtain information regarding the new schemes as well as be able to provide comments, in order to be better prepared for their implementation once the regulations are formalized.

The Shanghai FTZ is highly regarded by both the Chinese government and foreign investors as a key initiative for experimenting with financial reform. Both the PBOC and CBRC have announced measures to support the initiative.

However, while key principles are on point, institutions need clear operational procedures to conduct business and develop new products, which are in alignment with regulatory intentions. AmCham China member companies welcome opportunities to engage with Chinese regulators regarding experimentation of measures within the zone.

During the State Council Executive Meeting on January 8, 2014, Premier Li Keqiang asked the Chinese government to move to a negative list model when handling government approvals. In its 2013 Work Conference, the CBRC also called for regulatory reform, decentralizing the authority to market and delegate power. AmCham China members would like to see the negative list approach be adopted in the daily supervision of the banking industry and the reduction of approvals and licenses needed for banks to offer new services and products, provided that they can be held accountable for the financial risks involved and that their customers are capable of making informed purchasing decisions.

As China looks to reform state-owned enterprises and open up the banking market to private enterprises, foreign banks are still subject to a 20 percent investment ceiling when investing in a local Chinese bank. AmCham China urges banking regulators to revisit this arrangement and raise the ceiling, even if in a gradual manner, to incentivize foreign banks to transfer more of their expertise and best practices to their Chinese partners.

Securities and Bonds

Innovation in Business LicensesAmCham China welcomes the CSRC’s moves to allow securities joint ventures (SJVs) to participate in the A-share stock market and shorten the operating period required to apply for new licenses from five to two years. As all SJVs are independent and managed under strict corporate governance rules, new licenses incentivize foreign shareholders of SJVs to introduce additional products and experience into China’s capital markets.

Unfortunately, unnecessary measures such as regulated capital requirements and detailed ratings thresholds hinder securities firms’ participation in specific business sectors, such as private placement bonds, assets-backed securitization and mezzanine financing. Notably, some underwriting and advisory services that securities firms regularly provide do not deploy capital, thus limiting the risk and need for related capital requirements.


Given the need for higher competition and innovation in the above subsectors, AmCham China urges regulators to more flexibly grant business licenses related to innovative products to SJVs. AmCham China also suggests that the Chinese government open the market for mergers and acquisitions advisory and bidding services equally to all China-based securities firms. Moreover, the grace period for new licenses should be shortened for business lines with limited risk and deployed capital.

Non-transparent Regulatory Structure and Credit Rating SystemChina’s bond market has grown significantly over the past decade and is now the second largest in Asia. China’s debt market is governed by a large number of regulatory bodies, including the PBOC, CBRC, CSRC, the quasi-governmental National Association of Financial Market Institutional Investors (NAFMII), National Development and Reform Commission, and the Ministry of Finance. In many cases, companies require approval by more than one regulator to issue bonds, resulting in time-consuming, repetitive, and unclear procedures.

To reform the debt capital market, AmCham China recommends that the Chinese government establish a transparent regulatory structure with clarified roles between regulatory bodies in the bond market, and promote self-regulatory bodies to encourage market participation and an accurate and transparent credit rating system. Both moves would benefit the further development of China’s exchange bond market. AmCham China urges regulators to clarify criteria and requirements for issuers and investors to enter the bond market, and to further lift the capital requirements for financial bonds issuance. China should also establish a unified, linked, and multi-currency clearing platform to centralize global bond trading transactions outside of the exchange market and attract foreign participation.

Over-the-Counter Financial DerivativesAmCham China supports the CSRC’s initiative in setting up over-the-counter financial derivatives among securities firms. We suggest that SJVs be granted full access to this market from the outset, and also propose increasing the connectivity between the above market and the inter-bank, China Financial Futures Exchange (CFFEX), and other exchange markets for the sake of maintaining liquidity.

Recent PBOC Report on Liberalizing the Capital AccountAmCham China members took note of reports released by the Survey and Statistics Department of the PBOC in February and April 2012 and January 2013, which described the implementation roadmap for China of RMB internationalization, capital account liberalization, and more market-oriented interest and exchange rates. AmCham China welcomes the measures taken by the Chinese government to facilitate the realization of these goals. We encourage Chinese authorities to continue in this direction, liberalizing cross-border capital flows and allowing market mechanisms to determine currency values and deposit and lending rates.

Private EquityThe establishment of the CSRC as the industry regulator for the private equity (PE) industry in June 2013 increased industry confidence that regulations would evolve towards predictability and consistency. However, a policy vacuum exists for the following issues, primarily due to uncoordinated approaches between related regulators during this transition period.

Nature of RMB Funds Managed by Foreign General PartnersThe long-awaited pilot regulations in Shenzhen’s Qianhai Economic Zone, which are expected to provide some clarity on the domestic treatments that foreign general partner (GP) controlled RMB funds registered in Qianhai can enjoy, have not yet been released. One of the key reasons behind the delay is reportedly due to disagreements between key regulators regarding which agency should take the lead in developing such policy, although the draft regulations have already been put in place. AmCham China recommends the utilization of a “domestic in nature” treatment for foreign GP controlled RMB funds.

Income Tax Rules for PartnershipsThe State Administration of Taxation has been drafting partnership income tax rules since March 2012. However, the rules, even in draft format, have not yet been released for industry comment, reportedly due in part to a lack of support from other ministries. AmCham China recommends that international “see-through” income tax practices be utilized to avoid double taxation. We additionally recom-mend that regulators keep the 20 percent tax rate for both individual and institutional partners, as already adopted by the majority of local governments, and refrain from taxing foreign LPs as if they have permanent establishments in China.


Variable Interest Entities and the No. 10 DocumentRegulatory uncertainties associated with variable interest entities (VIEs) have harmed foreign investors’ confidence in those industries and overseas listed Chinese companies that adopt the VIE structure. While some regulators have expressed their intention to revise Document No. 10, from the 2006 “Interim Provisions for Foreign Investors to Merge

Domestic Enterprises,” and/or adopt controlled liberalizations for those enterprises domiciled in certain areas, revisions have yet to be made. The revision of Document No. 10 would likely affect the legal structure and the compliance practices of those companies listed overseas, including the performance of their share price.

Draft Regulations on Private Placement FundsMore than ten ministries and bureaus are reportedly reviewing draft regulations on private placement funds. These regulations, expected to be at the State Council level, will establish a clear and authoritative regulatory framework regarding how the PE industry should be regulated. However, the industry is concerned that the information PE managers and their funds will potentially be required to file with the CSRC-affiliated industry associations will create an undue burden on the managers. Such an approach would go against the global trend of a self-managed industry.

Interbank MarketsThere are no SJVs licensed to underwrite commercial paper or mid-term notes in the inter-bank market. Although the CSRC-rated “AA” threshold appears to be applied on an equal basis, the rating of an SJV is in fact decided entirely by that of its Chinese partner, not on the global credentials and performance of the foreign partner. Thus, in practice, SJVs are excluded from the market.

AmCham China urges the PBOC and NAFMII to recognize foreign firms’ global experience, thereby introducing more competition and allowing the issuer more freedom in selecting the underwriter based on its own assessment of both service and price. The pool of underwriters should include all locally incorporated banks and securities firms who would have passed the minimum requirements and are fairly registered. Foreign firms have been providing such services globally for decades. National treatment for foreign financial institutions will provide Chinese firms better products, more alternatives, and lower costs.

Credit RatingNew or amended regulations for credit rating agencies have been put in place worldwide including in the US, EU, Japan, Australia, Argentina, Hong Kong, Singapore, Canada, and Brazil. These credit ratings agencies come together in the International Organization of Securities Commissions (IOSCO). That organization’s Fundamental Code of Conduct for Credit Rating Agencies is currently being reviewed and the IOSCO recently announced the creation of supervisory colleges for internationally active credit rating agencies.

These colleges will serve as a resource for supervisors by facilitating the exchange of information, consultation, and cooperation. This will help ensure that credit rating agencies are regulated consistently across the globe, a critical issue in light of the international nature of credit ratings and their usage.

Unfortunately, China’s bond market is still governed by a large number of regulatory bodies, resulting in a lack of unified supervision and fundamental laws and standards for credit rating agencies. These bodies do not follow global standards on regulating credit rating agencies. AmCham China believes it is important for Chinese regulators to follow the G-20 consensus on regulating credit rating agen-cies in line with international standards.

In view of the interconnectivity of the global financial system, AmCham China recommends that the Chinese government adopt measures to encourage competition in its domestic credit rating industry by both local and foreign credit rating agencies, which will serve to promote the quality and transparency of credit ratings issued within China. Such opening of the domestic credit rating industry will also meet the need for less well-known issuers to gain market access by having information and analysis of their credit widely available on a comparable basis. This will also aid the development of China’s debt capital markets, including its bond markets.

In addition, to accelerate progress in reducing reliance on credit rating agencies in China, AmCham China recommends that regulators follow prevailing international practices and remove mandatory ratings requirements from relevant financial sector rules. Credit ratings should constitute one, but not the only, way of assessing credit risk. Another option may be to include ratings in regulations as one alternative—but not the sole option—to assess credit risk. Additionally, such actions would also require that individual ratings assigned by credit ratings agencies be judged on the performance and accuracy of the rating, rather than become an administrative requirement for issuers and buyers of debt securities.


This would also promote better risk management in the financial services sector and contribute to the overall healthy development of capital markets in China.

Recent DevelopmentsAmCham China appreciates efforts made by Chinese financial regulators to coordinate the exchange and interbank markets. In particular, the recent opening of the interbank market to securities firms in underwriting debt financing instruments for non-financial enterprises through NAFMII Decree [2012] No. 18 is welcomed as it makes significant progress towards allowing more options for issuers.

In 2013, the PBOC’s medium-term note market developed rapidly, with indications that the CSRC is interested in developing a corporate bond market. With the gradual deregulation and reform of interest rates, the bond market has begun to develop as well. A key requirement to develop the market is a reliable yield curve based on significant secondary market trading. AmCham China encourages further developments in this regard.

Liquidity ManagementDeposits, interbank borrowing and lending, and shareholder’s equity are the main funding sources for foreign banks in China. However, deposits and interbank funding tend to be relatively unstable and short in tenor. The dependence on capital injection by offshore shareholders as the only source of reliable funding presents a significant challenge to foreign banks in their assets and liability management. Even shareholder’s equity implies a certain amount of risk. China’s foreign exchange controls limit the availability of funding from offshore shareholders to their branch operations in China. Altogether, in the event of a liquidity crisis, foreign-invested banks would face elevated risks.

As foreign banks in China are usually small in assets and face greater liquidity management challenges, AmCham China hopes that policies relating to capital access requirements can be relaxed, for example, by accepting credit enhancement through direct or indirect guarantees provided by offshore parent companies, and allowing the market to determine the outcome, size, tenor, and price of the bond issuance.

Recommendations:RMB Internationalization• Release further information on the establishment

of the China International Payment System.

Commercial Banking• Raise the 20 percent investment ceiling imposed

on foreign banks when investing in local Chinese banks, to incentivize foreign banks to transfer more of their expertise and best practices to their Chinese partners.

Securities and Bonds• More flexibly grant SJVs business licenses related

to innovative products, and shorten the grace period for securities JVs to get new licenses.

• Open merger and acquisition advisory or bidding businesses equally for all the China-based securities firms.

• Grant full access for SJVs to over-the-counter financial derivatives.

Private Equity• Use “domestic in nature” treatment for foreign GP

controlled RMB funds.

• Keep the international “see-through” income taxes practice to avoid double taxation, keep the 20 percent tax rate for both individual and institutional partners, as already adopted by the majority of local governments, and do not tax foreign LPs as if they have permanent establishment in China.

Interbank MarketsFurther lift interbank limitations over foreign firms from the PBOC and the NAFMII.

• Allow issuers to select the best service provider for commercial paper and mid-term notes issuance business.

Credit Rating• Follow prevailing international practices, such as

the IOSCO Code, and remove mandatory ratings requirements from relevant financial sector rules.

Liquidity ManagementAllow foreign banks to access the bond and certificate deposits (CD) markets for diversified source of stable funding.

Source: A copy of the full report is available at www.amchamchina.org

© 2014 by the American Chamber of Commerce in the People’s Republic of China (AmCham China), all rights reserved.

The opinions of AmCham China in its White Paper on Financial Services 2014 are not necessarily the opinions of EY. They should be viewed in the context of the time they were expressed.


Appendix F European Chamber Banking & Securities Working Group 2014-2015

Key Recommendations:1.Restraints Affecting Non-Organic GrowthLift Restrictions on Ownership and Business Scope (SCLAO, CBRC, CSRC, PBOC, SAFE)

• Allow foreign banking, securities and fund management enterprises to compete on an equal footing with domestic institutions, including ownership structures and access to all lines of business.

• Allow foreign banks to acquire equity stakes of more than 20% (for single foreign shareholders) and 25% (for multiple foreign shareholders) in local Chinese banks.

• Allow foreign securities firms to:

(i) set up 100% owned securities subsidiaries in China with a full securities licence comparable to that of local Chinese securities firms; and

(ii) acquire equity stakes of more than 49% of local Chinese securities firms.

• Allow foreign fund management firms to: (i) set up 100% owned fund management subsidiaries in China with a full fund management licence comparable to local Chinese fund management firms; and (ii) acquire equity stakes of more than 49% of local Chinese fund management firms.

2. Restraints Affecting Organic Growth

2.1 Allow Easier Branch/Sub-Branch and Business Expansion (CBRC)• Enable locally-incorporated banks to provide annual

master plans for branch and sub-branch expansion to be preagreed in principle.

• Allow multiple, simultaneous branch and sub-branch expansion submissions.

2.2 Improve the Speed and Transparency of the Licence Approval Process (CBRC, PBOC, SAFE, CSRC)• Abolish the three-year waiting period to which foreign

banks are subject before being eligible to submit an application for a renminbi (RMB) licence.

• Speed up the RMB clearing membership licence approval as a part of the RMB licence.

2.3 Increase Access to the Bond Underwriting Market (PBOC, CSRC, MOF, NAFMII)• Grant foreign banks the same rights as local banks.

• Lower the access criteria for foreign banks, accelerate the approval of foreign banks and securities companies to underwrite Chinese Government Bonds (CGB), People’s Bank of China (PBOC) bills, and financial and corporate bonds in the inter-market.

• Build the basic framework of a normal liquid government bond market:

• with active and liquid government bond futures markets;

• with a broad range of liquid Over the Counter (OTC);

• with a broad and active investor base—both onshore and offshore; and

• with competitive tax rates.

2.4 Remove Foreign Debt and Guarantee Quota (SAFE, NDRC, PBOC)• Remove the short-term debt quota for genuine

trade-related uses and remove the Foreign Guarantee Quota.

• Deepen onshore liquidity by putting in place market-based means of funding, with the PBOC acting as lender of last resort, using international rates as a benchmark.

• Introduce a system where foreign-invested companies can renew their own foreign debt quota, if they have consumed the quota in the past.

Source: A copy of the full report is available at www.europeanchamber.com.cn


2.5 Review and Amend the Loan-to-Deposit Ratio Requirements (CBRC)• Start to revise the Commercial Banking Law to abolish

the loan-to-deposit ratio.

• Suspend the application of loan-to-deposit ratio in the China (Shanghai) Pilot Free Trade Zone (CSPFTZ) and other experimental financial reform zones.

• Allow other stable liquidity sources to be accounted for in the calculation of this ratio (particularly Credit Derivatives (CDs)).

2.6 Review Prudential Ratios (CBRC)• Remove the net of long-term borrowings from

overseas branches from current liabilities, to compare assets and liabilities with the same tenor and thus ensure equal treatment for Chinese and foreign banks as agreed by the World Trade Organization (WTO).

2.7 Address Funding Limitations in the China Foreign Exchange Trade System Interbank Market (PBOC)• Remove the two times capital limitation for all banks in

China.

3. Regulatory Relationship and Coordination

3.1 Involve Foreign Banks in Regulatory Discussions and Policies (SCLAO, CBRC, CSRC, PBOC, SAFE)• Engage foreign banks in the discussion on the macro

prudential supervisory framework, including but not limited to key regulatory and monetary measures such as RMB loan growth targets and reserve requirement ratio levels.

• Encourage the differentiation of regulatory requirements for banks of different types and sizes to accommodate for discrepancies in business models and the relatively small size of foreign banks in China that need to fulfil the regulatory requirements of both home and host regulators.

• Allow higher loan growth for foreign banks because the benefits of the accelerating development of China’s banking industry will significantly exceed the impact of foreign bank’s loan growth given their small market share.

3.2 Strengthen Coordination Amongst and Within Regulatory Authorities (SCLAO, CBRC, CSRC, CIRC, PBOC, SAFE, NDRC, MOFCOM)• Strengthen coordination and cooperation between

different government institutions and regulators with responsibility for financial services both at home and abroad.

• Establish one regulator as the authorized government body to play a proactive role in coordinating with other regulators, to share survey results and make sure regulators are on the same page regarding various supervision tasks.

• Find effective ways to simplify reporting requirements without sacrificing the necessary supervision of information.

© 2014 by the European Union Chamber of Commerce in China, all rights reserved.

The opinions the European Chamber Banking & Securities Working Group 2014-2015 are not necessarily the opinions of EY. They should be viewed in the context of the time they were expressed.


Province City branch

Sub-branch or rep office Total Bank

Anhui Hefei 1 1 2 BEAAnhui Hefei 1 1 HSBCBeijing Beijing 1 11 12 HSBCBeijing Beijing 1 10 11 SCBBeijing Beijing 1 8 9 CitiBeijing Beijing 1 7 8 BEABeijing Beijing 1 5 6 DBSBeijing Beijing 1 4 5 HangSengChongqing Chongqing 1 5 6 SCBChongqing Chongqing 1 4 5 HSBCChongqing Chongqing 1 4 5 BEAChongqing Chongqing 1 2 3 CitiChongqing Chongqing 1 1 DBSFujian Fuzhou 1 1 2 HangSengFujian Fuzhou 1 1 BEAFujian Fuzhou 1 1 SCBFujian Xiamen 1 5 6 HSBCFujian Xiamen 1 5 6 BEAFujian Xiamen 1 5 6 SCBFujian Xiamen 1 1 CitiFujian Xiamen 1 1 HangSengGuangdong Chaozhou 1 1 HSBCGuangdong Dongguan 1 3 4 HSBCGuangdong Dongguan 2 2 BEAGuangdong Dongguan 1 1 2 HangSengGuangdong Dongguan 1 1 DBSGuangdong Foshan 4 4 HSBCGuangdong Foshan 3 3 BEAGuangdong Foshan 2 2 HangSengGuangdong Foshan 1 1 SCBGuangdong Guangzhou 1 12 13 HSBCGuangdong Guangzhou 1 8 9 BEAGuangdong Guangzhou 1 6 7 SCBGuangdong Guangzhou 1 6 7 HangSengGuangdong Guangzhou 1 3 4 DBSGuangdong Guangzhou 1 4 5 CitiGuangdong Heyuan 1 1 HSBCGuangdong Huizhou 3 3 HSBC



Guangdong Huizhou 1 1 BEAGuangdong Huizhou 1 1 HangSengGuangdong Jiangmen 2 2 HSBCGuangdong Jiangmen 1 1 BEAGuangdong Jiangmen 1 1 HangSengGuangdong Jieyang 1 1 HSBCGuangdong Jieyang 1 1 BEAGuangdong Maoming 1 1 HSBCGuangdong Maoming 1 1 BEAGuangdong Meizhou 1 1 HSBCGuangdong Qingyuan 1 1 HSBCGuangdong Qingyuan 1 1 BEAGuangdong Shantou 2 2 HSBCGuangdong Shantou 1 1 BEAGuangdong Shantou 1 1 HangSengGuangdong Shaoguan 2 2 HSBCGuangdong Shaoguan 1 1 BEAGuangdong Shenzhen 1 11 12 HSBCGuangdong Shenzhen 1 10 11 BEAGuangdong Shenzhen 1 8 9 SCBGuangdong Shenzhen 1 5 6 CitiGuangdong Shenzhen 1 5 6 HangSengGuangdong Shenzhen 1 1 2 DBSGuangdong Yangjiang 1 1 HSBCGuangdong Zhanjiang 1 1 HSBCGuangdong Zhanjiang 1 1 BEAGuangdong Zhaoqing 1 1 HSBCGuangdong Zhongshan 4 4 HSBCGuangdong Zhongshan 2 2 BEAGuangdong Zhongshan 1 1 HangSengGuangdong Zhuhai 1 3 4 BEAGuangdong Zhuhai 1 3 4 SCBGuangdong Zhuhai 3 3 HSBCGuangdong Zhuhai 1 1 HangSengGuangxi Nanning 1 1 HSBCGuangxi Nanning 1 1 DBSGuizhou Guiyang 1 1 CitiHebei Shijiazhuang 1 1 BEA

Appendix GBig six retail foreign bank branches, sub-branches, and representative offices

The branch data has been obtained from the banks’ websites. However, this information is not always current and therefore, is subject to change.Banks are invited to submit any omissions and the chart and table will be updated.




Hebei Tangshan 1 1 HSBCHeilongjiang Harbin 1 1 HSBCHeilongjiang Harbin 1 1 BEAHenan Zhengzhou 1 1 2 BEAHenan Zhengzhou 1 1 HSBCHenan Zhengzhou 1 1 SCBHubei Wuhan 1 4 5 HSBCHubei Wuhan 1 1 2 BEAHubei Wuhan 1 1 SCBHunan Changsha 1 1 HSBCHunan Changsha 1 1 CitiHunan Changsha 1 1 BEAHunan Changsha 1 1 SCBJiangsu Nanjing 1 4 5 SCBJiangsu Nanjing 1 1 2 HSBCJiangsu Nanjing 1 1 2 BEAJiangsu Nanjing 1 1 2 HangSengJiangsu Nanjing 1 1 CitiJiangsu Nantong 1 1 HSBCJiangsu Suzhou 1 6 7 HSBCJiangsu Suzhou 1 3 4 SCBJiangsu Suzhou 1 2 3 BEAJiangsu Suzhou 1 1 2 DBSJiangsu Wuxi 1 1 HSBCJiangsu Wuxi 1 1 CitiJiangsu Wuxi 1 1 BEAJiangsu Yangzhou 1 1 HSBCJiangxi Nanchang 1 1 2 SCBLiaoning Dalian 1 6 7 BEALiaoning Dalian 1 4 5 HSBCLiaoning Dalian 1 3 4 SCBLiaoning Dalian 1 2 3 CitiLiaoning Shenyang 1 5 6 BEALiaoning Shenyang 1 2 3 HSBCNei Mongol Hohhot 1 1 SCBShaanxi Xi'an 1 6 7 BEAShaanxi Xi'an 1 2 3 HSBCShaanxi Xi'an 1 1 SCBShandong Jinan 1 1 HSBC



Shandong Jinan 1 1 BEAShandong Jinan 1 1 SCBShandong Qingdao 1 4 5 HSBCShandong Qingdao 1 4 5 SCBShandong Qingdao 1 2 3 BEAShanghai Shanghai 1 20 21 HSBCShanghai Shanghai 1 14 15 CitiShanghai Shanghai 1 13 14 BEAShanghai Shanghai 1 12 13 SCBShanghai Shanghai 1 10 11 HangSengShanghai Shanghai 1 9 10 DBSShanxi Taiyuan 1 1 HSBCShanxi Taiyuan 1 1 SCBSichuan Chengdu 1 3 4 HSBCSichuan Chengdu 1 3 4 BEASichuan Chengdu 1 3 4 SCBSichuan Chengdu 1 2 3 CitiTianjin Tianjin 1 6 7 HSBCTianjin Tianjin 1 6 7 SCBTianjin Tianjin 1 4 5 CitiTianjin Tianjin 1 2 3 HangSengTianjin Tianjin 1 1 2 BEATianjin Tianjin 1 1 DBSXinjiang Uygur

Urumqi 1 1 2 BEA

Yunnan Kunming 1 1 HSBCYunnan Kunming 1 1 BEAYunnan Kunming 1 1 HangSeng

Zhejiang Hangzhou 1 5 6 SCB

Zhejiang Hangzhou 1 4 5 HSBCZhejiang Hangzhou 1 3 4 Citi

Zhejiang Hangzhou 1 2 3 BEA

Zhejiang Hangzhou 1 1 2 DBS

Zhejiang Hangzhou 1 1 HangSeng

Zhejiang Ningbo 1 2 3 SCB

Zhejiang Ningbo 1 1 2 HSBC

Zhejiang Ningbo 1 1 BEA

Zhejiang Ningbo 1 1 HangSeng


Jack ChanManaging PartnerFinancial Services, EY Greater China+86 10 5815 [email protected]

Geoffrey ChoiAssurance LeaderFinancial Services, EY Greater China+86 10 5815 [email protected]

Kelvin LeungBanking & Capital Markets LeaderFinancial Services, EY Greater China+86 10 5815 [email protected]

Shelley ChiaFinancial Accounting Advisory Services LeaderFinancial Services, EY Greater China+86 10 5815 [email protected]

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