Future Growth, Future Risks: Opening Up the Financial Services Industry
Monday 13th September 2004 - 11:00am - 12:30pm
Future Growth, Future Risks: Opening Up the Financial Services Industry
China Business Summit 2004
China's financial services industry is undergoing tremendous change, with substantial liberalization of its capital markets, efforts to bring its major banks to market, and foreign banks making inroads into the domestic market. Yet the sector still faces formidable challenges, not the least of which are the ever present spectre of non performing loans (NPLs) and a rapidly greying population placing strains on an already weak social safety net. What needs to be done to see reforms through in banking, capital markets, insurance and social security? As Moderator Reginald Chua, Editor, The Asian Wall Street Journal, Hong Kong SAR, pointed out, this was a panel whose size was commensurate with the breadth of its topic.
Zhang Lee, Chairman, China, and Head, Global Corporate Finance, Asia, Deutsche Bank, Hong Kong SAR, provided an overview of the hurdles faced by foreign banks as they make their initial forays into China. The barriers to entry remain high, as Zhang made clear: foreign banks are only permitted to open one branch and two sub branches every two years, must undergo a long qualification process and demonstrate a minimum number of years of profitability, are limited in the amounts of renminbi they may expatriate and in the range of products they are able to offer. Foreign banks will tend, as other participants echoed, to seek mutually beneficial partnerships with local banks, especially city commercial banks.
Liu Kegu, Vice Governor, China Development Bank, People's Republic of China, stressed that China must find its own road towards market oriented banking reforms and should not, as other Asian countries have done, simply duplicate foreign banking models a strategy that led, Liu suggested, to the 1997 Asian Financial Crisis. Liu reviewed a lengthy list of prescriptions for banking reforms, emphasizing the centrality of market forces in structural reorganization, in encouraging participation of private investment and development of privately owned banks and perhaps most interestingly in allowing a greater role to market forces in determining interest and currency exchange rates.
Zhu Min, Executive Assistant President, Bank of China, People's Republic of China, revisited the subject of foreign banking in China, suggesting that initial Chinese anxiety about the onslaught of major international financial institutions after China s WTO accession was unfounded: he noted that foreign banking assets as a percentage of national totals actually dropped from 2.48% at China s entry into the WTO to only 1.62% today. Foreign banks, said Zhu, have realized how hard it is to do business in China. In addition to some of the hurdles enumerated by Zhang, Zhu added that foreign banks simply don t have the RMB assets to be effective lenders in China. Opening only a branch or two a year, they ll never compete in retail banking against the Bank of China, which has 11,000 branches nationwide. Like Zhang, Zhu stressed the importance of partnerships with domestic banks: "Foreign companies gain growth and profits; Chinese banks gain managerial skills, good governance and, of course, US dollars."
Babak Nikzad, Partner, KPMG, Hong Kong SAR, listed several basic challenges to financial services in China: a shortage of quality people in accounting and other sector specific skills; a rapidly changing and badly fragmented regulatory environment; inconsistency in the application of rules and regulations both across and within institutions; a general inability to assess the financial soundness of borrowers; the huge level of NPLs in the portfolios of most lending institutions; and the persistent problem of low capital adequacy ratios despite recent efforts to shore them up through the injection of funds by the government and the issuance of domestic equity and subordinated debts. In discussion of the manpower issue, Nikzad s observations were seconded by Zhu, who detailed woes that the Bank of China has had in personnel reviews reviews which he estimates will result in the penalization of up to one fourth of the banks 230,000 employees.
Paul W. Speltz, US Treasury Emissary to the People's Republic of China, summarized the Bush administration s line on the need for currency revaluation, noting that market based mechanisms and not macroeconomic interventions are better tools for cooling the Chinese economy. Speltz pointed to numerous signs that China's leaders are preparing for more flexibility in the exchange rate, noting for example the far reaching reforms in financial markets including currency exchange and interest rate derivatives that will allow hedging against changes. "Why would they be doing this if they weren t moving to a more flexible exchange rate?" he asked.
Thomas Putter Chief Executive Officer, Allianz Capital Partners, Germany, gave an overview of the development of China s enormous insurance market a market with US$ 46.8 billion in gross premiums written annually, growing in the first half of 2004 at a rate of 25% annualized. Foreign providers market share, however, remains small at roughly 2% but Putter believes that the WTO accord s implementation has already opened the market considerably. He singled out one area provision of third party liability auto insurance from which foreign providers are now restricted, noting that between 70 and 80% of non life policies issued are in car insurance.
Peter Yandle, Senior Managing Director, International Marketing, NASDAQ Stock Market, USA, stressed the need for China s securities regulators to develop appropriate financial products, including most importantly pension products for social welfare. Pointing to the recent launch of the second board in Shenzhen, focused on high tech small and medium enterprises, he noted parallels with NASDAQ, and concluded his remarks with a call for a high level of disclosure with a transparent market structure involving all financial institutions and drawing on the expertise of foreign companies and bourses.
Tang Min, Deputy Resident Representative and Chief Economist, Asian Development Bank, People s Republic of China, closed out the session with remarks about the ADB s work in facilitating the transfer of international banking expertise and experience to China s financial sector. Adding his voice to the chorus of calls for increased transparency and for shoring up legal systems, he also noted that particularly in light of the recent credit crunch small and medium enterprises are finding it especially difficult to get access to credit, and noted that private domestic investment, private sector banks and rural credit cooperatives can play a significant role in filling in these gaps.
Related LinkChina Business Summit
Deputy Managing Director, International Monetary Fund (IMF), Washington DC
BA in Economics, Fudan University; MPA, Woodrow Wilson School of Public and International Affairs, P...
Executive Vice-Chairperson, YouChange, People's Republic of China
Graduate, Wuhan Univ.; studies, Univ. of Illinois; PhD. 1989, with Dev. Research Centre, Asian Dev. ...