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Foreign bankers' blues as middle class rushes back to big state banks
By Sean Maguire |
June 12, 2009, Friday
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Print Edition
Print Edition
THE Shanghai Bureau of the China Banking Regulatory Commission recently announced that two or three more foreign banks are to be locally incorporated in Shanghai.
The banks are as yet unnamed, but the announcement is in keeping with the city's ambitions to become the regional powerhouse of financial services provision. As foreign bankers race to find a place at the table, those already seated are shifting in their seats under the watchful eyes of their hosts.
Over the past couple of years, 30 foreign banks have incorporated in China with the figure expected to rise to 100 by 2011. Local incorporation allows these foreign banks to compete with domestic institutions in offering retail yuan banking services.
Though this allows them access to the burgeoning domestic market, the global economic slump and the fragile condition of many multi-national financial institutions are creating a palpable sense of nervousness among foreign banks in China.
Though Chinese authorities have resisted the temptation to halt the opening-up of the Chinese banking sector in the midst of the global financial crisis, a number of restrictions nevertheless apply.
Foreign banks are obliged to comply with regulations as to how much lending they can engage in as determined by quarterly lending ratios, although foreign banks do receive a slightly more generous year-on-year percentage increase than their domestic counterparts.
Chinese regulators are also keen to steer the direction of lending streams for foreign banks as a way of supplementing government stimulus plans. Shanghai regulators have urged foreign banks not to cut lending to companies in the city, particularly to small- and medium-sized business - and to the agricultural sector.
In addition to pressure from above, foreign banks are being squeezed from the ground up as local customers look to domestic banks as safe havens for their cash.
A number of prestigious foreign institutions had a field day selling wealth management products under China's Domestic Qualified Institutional Investor (QDII) scheme, launched in 2006. The scheme directed around US$40 billion of China's estimated US$2 trillion worth of household savings into overseas financial markets.
This appeared to be a "win-win" scenario. Chinese customers were able to gain access to the best of what the international financial markets had to offer and the foreign banks were provided both with an additional income stream and an opportunity to encourage a swathe of wealthy Chinese customers into the lobbies of their branch offices.
In the hope of pumping up their domestic presence, foreign banks offered over 200 QDDI products, quadrupling the number offered by Chinese banks and basing their appeal on confidence that Chinese clients would be attracted to their deeper and more sophisticated product offerings, compared with domestic banks, and to their global client relationships.
Typically, client money was invested in overseas mutual funds, often through structured notes. The mutual funds invested both in equities and fixed-income assets globally.
But with the recent turmoil in the world equities markets, almost 50 per cent of QDII products sold by foreign banks have lost significant value - a disaster for those banks hoping to build trust and confidence with local clients. After period of intense and passionate wooing by the banks, Chinese customers are turning away, filled with indignation and regret.
The global banking crisis and China's economic downturn have combined to make foreign banks more risk-sensitive than ever.
Although things may be a little uncomfortable at the moment, there is still plenty of room left at the table for those with the elbows to make space for themselves.
(The author is counsel of AllBright Law Offices in Shanghai. The views are his own. His e-mail: sbmaguire@allbrightlaw.com.)
The banks are as yet unnamed, but the announcement is in keeping with the city's ambitions to become the regional powerhouse of financial services provision. As foreign bankers race to find a place at the table, those already seated are shifting in their seats under the watchful eyes of their hosts.
Over the past couple of years, 30 foreign banks have incorporated in China with the figure expected to rise to 100 by 2011. Local incorporation allows these foreign banks to compete with domestic institutions in offering retail yuan banking services.
Though this allows them access to the burgeoning domestic market, the global economic slump and the fragile condition of many multi-national financial institutions are creating a palpable sense of nervousness among foreign banks in China.
Though Chinese authorities have resisted the temptation to halt the opening-up of the Chinese banking sector in the midst of the global financial crisis, a number of restrictions nevertheless apply.
Foreign banks are obliged to comply with regulations as to how much lending they can engage in as determined by quarterly lending ratios, although foreign banks do receive a slightly more generous year-on-year percentage increase than their domestic counterparts.
Chinese regulators are also keen to steer the direction of lending streams for foreign banks as a way of supplementing government stimulus plans. Shanghai regulators have urged foreign banks not to cut lending to companies in the city, particularly to small- and medium-sized business - and to the agricultural sector.
In addition to pressure from above, foreign banks are being squeezed from the ground up as local customers look to domestic banks as safe havens for their cash.
A number of prestigious foreign institutions had a field day selling wealth management products under China's Domestic Qualified Institutional Investor (QDII) scheme, launched in 2006. The scheme directed around US$40 billion of China's estimated US$2 trillion worth of household savings into overseas financial markets.
This appeared to be a "win-win" scenario. Chinese customers were able to gain access to the best of what the international financial markets had to offer and the foreign banks were provided both with an additional income stream and an opportunity to encourage a swathe of wealthy Chinese customers into the lobbies of their branch offices.
In the hope of pumping up their domestic presence, foreign banks offered over 200 QDDI products, quadrupling the number offered by Chinese banks and basing their appeal on confidence that Chinese clients would be attracted to their deeper and more sophisticated product offerings, compared with domestic banks, and to their global client relationships.
Typically, client money was invested in overseas mutual funds, often through structured notes. The mutual funds invested both in equities and fixed-income assets globally.
But with the recent turmoil in the world equities markets, almost 50 per cent of QDII products sold by foreign banks have lost significant value - a disaster for those banks hoping to build trust and confidence with local clients. After period of intense and passionate wooing by the banks, Chinese customers are turning away, filled with indignation and regret.
The global banking crisis and China's economic downturn have combined to make foreign banks more risk-sensitive than ever.
Although things may be a little uncomfortable at the moment, there is still plenty of room left at the table for those with the elbows to make space for themselves.
(The author is counsel of AllBright Law Offices in Shanghai. The views are his own. His e-mail: sbmaguire@allbrightlaw.com.)
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