OPINION

Foreign Banks Sure to Come Back

Since China's entry into the WTO, foreign financial institutions' assets have not yet witnessed any remarkable increase against the total assets of China's banking industry and, instead, even reported a decline after the global financial crisis.

Statistics show an increase of only 0.11 percentage points in the proportion of foreign banks' assets from 1.82 percent in 2001 to 1.93 percent in 2011, which was lower than the record high of 2.38 percent before the financial crisis.

Moreover, plagued by the gloomy world economy, some foreign banks have been withdrawing capital from China. By 2011, the Royal Bank of Scotland had almost completely retreated from China's retail banking market, which coincided with the massive withdrawal of the Hong Kong and Shanghai Banking Corp. Similar big actions can also be seen in foreign strategic investment in China's state-owned banks.

What's behind this? In the retail banking market, without an efficient network to attract deposits and make loans, foreign banks cannot compete with local banks on an equal basis. Even multinationals, their traditional customers, began to cut back on credit demand after the financial crisis. In addition, higher operation costs of foreign banks than their Chinese rivals and the undermined reputation by the poor performance of QDII wealth management products are the culprits behind the decline of foreign banks.

In the capital market, it is time for foreign banks to make a profit from their strategic investment in China's state-owned banks. In the meantime, the country's banking industry has delivered its best performance, so it's wise to secure profits by unloading.

However, these foreign banks are likely to come back together with more foreign financial institutions emerging in the near future.

China is undergoing financial reform. Financial deregulation and a more open market will surely bring the strengths of foreign banks into full play.

In early June, the People's Bank of China, the central bank, announced expansion of the floating range of deposit and lending rates, a major step in the market-oriented reform of interest rates. With the implementation of the new rule, the deposit rates of commercial banks are beginning to differentiate, particularly long-term deposit rates. China's "big four" state-owned commercial banks set their three-year and five-year interest rates at 4.65 percent and 5.1 percent, respectively, compared with the 1.6-percent and 1.7-percent rates adopted by major foreign banks like Standard Chartered Bank. Since the cost of capital is quite differentiated among banks, the long-term rates are varied.

While it is difficult for foreign banks to eliminate their weakness in operation costs, such positive pricing suggests foreign banks intend to go ahead steadily, rather than expanding blindly.

With the deepening of China's financial reform, a further relaxation on price regulation will highlight foreign banks' advantage in pricing.

Without a doubt, foreign banks will see more profits come from the opening of China's financial market, especially the yuan's globalization and the opening of capital and financial accounts.

In a word, China's financial reform will not only give play to foreign banks' strengths, but also make the Chinese market more attractive. Foreign banks are bound to come back. Given their disadvantages in localization, they are recommended to come back by acquiring Chinese-funded banks.

This is an edited excerpt of a report by Anbound, a Beijing-based research company, published on the website of Caijing Magazine

THE MARKETS

Dairy Cooperation

China Mengniu Dairy Co. Ltd., one of the country's leading dairy producers, announced that it has entered a long-term strategic cooperation with European dairy giant Arla Foods on June 18.

Arla Foods will invest HK$2.2 billion ($283.6 million) for a 5.9-percent stake in Mengniu, making it the second largest strategic shareholder of Mengniu, after the China National Cereals, Oils and Foodstuffs Corp. (COFCO), the country's largest food manufacturer and trader. The deal is the largest international cooperation in China's dairy industry so far.

Arla Foods is a world leader in dairy farming, pasture management, research and development, quality management and production processes. It will be involved in Mengniu's daily operations, send professionals to work with Mengniu employees, help Mengniu update production technology and improve its management system, said Ning Gaoning, Board Chairman of COFCO.

Overseas Ambition

Chinese telecom equipment giant Huawei Technologies on June 14 opened its first overseas training center in Malaysia's technology hub Cyberjaya, as part of its nearly $30-million project to develop talent in the information technology sector.

The center's opening came after Huawei signed an agreement in April 2011 with 10 Malaysian universities. The Shenzhen-based firm plans to help train 10,000 Malaysian professionals in the information and communications technology field over the next four years.

"The training centers serve not only the Malaysian and Asian markets but also the world," said Victor Wang, Vice President of Huawei Asia Pacific.

Huawei has operations in over 140 countries, supplying its products to almost one third of the world's population.

NUMBERS

6.77 trillion yuan

From January to May, China's private fixed-asset investment totaled 6.77 trillion yuan ($1.07 trillion), up 26.7 percent year on year.

1.31 trillion yuan

Private fixed-asset investment in west China stood at 1.31 trillion yuan ($206.58 billion) from January to May, up 32.6 percent year on year, faster than that of central and eastern regions.

3.0155 trillion yuan

Private fixed-asset investment in the service sector totaled 3.02 trillion yuan ($474.34 billion) from January to May.

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