The Olympic games will be held in Beijing in 2008, yet a much more competitive and aggressive race has already started: the fight for a slice of China's financial services industry. Western banks and insurers are snapping up stakes in Chinese financial services companies, and the Chinese government is actively encouraging more to invest in the country's financial industry - their expertise in the effective distribution of financial products is one reason why the government is so keen to get them on board.
In the run-up to 2007, when the country's financial services must be opened up to full international competition as a condition of China's membership of the World Trade Organisation (WTO), Western financial services companies are fighting to get an early foothold in the seemingly highly lucrative Chinese financial services industry.
"They are being drawn to Chinese banks' most valuable asset - their huge branch networks," says May Yan, vice-president and senior analyst, financial institutions - Asia-Pacific, at the Hong Kong office of rating agency Moody's, in an interview with FSD. "The Big Four Chinese banks the Industrial and Commercial Bank of China, the Bank of China, China Construction Bank, and the Agricultural Bank of China , which account for 60 percent of China's national banking assets, have actually been cutting branches and staff to increase efficiency and profits ahead of WTO the 2007 deadline - but they remain by far the most important distribution channel."
The latest non-Chinese financial company to enter the fray was Dutch bancassurer ING, which bought a 19.9 percent stake in Bank of Beijing for CNY1.78 billion ($22 million) at the end of March. Bank of Beijing is the second-largest city commercial bank in China and the third- largest bank in Beijing. It employs over 3,600 staff and serves retail and corporate clients through 116 branches (small figures compared to the 390,000 staff and 20,000 branches of the Industrial Commercial Bank of China ICBC ). It also has a network of 272 ATMs and a rapidly growing e-banking business. At the end of 2004, the bank had total assets of CNY209 billion.
ING's investment is an important step towards developing a distribution platform in China, utilising the Bank of Beijing's branch network and other channels to offer insurance and wealth management products to new and existing customers of the bank. Announcing the deal with Bank of Beijing, Michel Tilmant, ING chairman, said: "We believe there is large growth potential for retail banking in China, and in Beijing in particular. This investment will allow ING to deepen its penetration into the Beijing market, and provides us with a platform to sell a range of insurance and investment products to an increasingly affluent customer base."
The acquisition follows the opening of a new branch office in Beijing for ING Capital Life Insurance, a joint venture between ING and Beijing Capital Group. In terms of asset management, ING is currently active in Beijing through China Merchants Fund Management, which is a joint venture with China Merchants Securities - together they offer bond, cash and equity funds to domestic Chinese retail and institutional investors.
A win-win situation, says HSBC
According to Yan at Moody's, while Chinese banks already cross-sell insurance products at branches, a bank such as ING will bring its distribution experience to the table. ING itself says that the agency channel accounts for 80 percent of insurance sales in China, while bancassurance has emerged as the second-largest channel. Bancassurance accounts for 30 to 40 percent of new business, says ING, and is most developed in large cities such as Beijing and Shanghai.
Bank of Beijing will start selling the life and personal accident policies of ING's joint venture ING Capital Life Insurance. ING Capital Life is also looking to launch universal life and group insurance products in Dalian later this year and will quickly roll out these new products in the Beijing market.
HSBC, the world's second-largest bank by assets, has one of the most developed Chinese operations. It has the largest network of any foreign bank in China, consisting of ten branches, three sub-branches and two representative offices. Launched in 2002, the bank's online banking service is used by 25 percent of its customers. HSBC offers 24-hour phone banking, and has 11 on-site and 16 off-site ATMs.
Between 2001 and 2004, HSBC invested around $2.6 billion in Chinese financial companies. In December 2001, it took an 8 percent stake in Bank of Shanghai (200 branches around Shanghai) for $62.6 million. In October 2002 it acquired a 10 percent stake in Ping An Insurance (China's second-largest life insurance company) for $600 million. In August 2004 it took a 19.9 percent stake in Bank of Communications (BoCom) (China's fifth-largest bank, with 2,700 branches in 137 cities) for $1.7 billion. And in September 2004 it bought a 33 percent stake in a joint venture fund management company, alongside Shanxi Trust and Investment Corporation, for $8 million.
Asked about the reasons behind these stakes, a spokesperson for HSBC in Shanghai says: "As a minority shareholder in these domestic financial institutions, it remains HSBC's long-term goal to leverage on our strategic partners' networks to create win-win situations."
She adds: "As China liberalises its financial services sector, we want to be the first in the gate as soon as it opens - we have many people on the ground to ensure we keep up with developments. We have obtained licences for all the businesses that are open to foreign banks. We want to maintain and reinforce HSBC's number one position among foreign banks in mainland China."
Two-way push and pull
Western banks and financial services companies have actively been approached by Chinese banks and Chinese authorities keen for them to invest in Chinese companies and inject not only much needed capital but also corporate governance, risk management, customer service and, of course, distribution expertise.
Bank of China, for instance, publicly announced at the start of April that it was negotiating with about ten potential foreign strategic partners - including Deutsche Bank, UBS, Bank of America and possibly Royal Bank of Scotland - ahead of a pioneering overseas listing possibly as early as this year. The IPO is seen as a crucial part of the Chinese government's effort to reform the country's financial system, especially the big state banks.
In a speech given last April, Zhou Xiaochuan, governor of the People's Bank of China, the country's central bank, said: "In the mid and long term, we are confident in China's banking reform and hope that more foreign-funded financial institutions will participate in this market to promote competition, innovate and improve services, and strengthen economic prosperity and development."
Other distribution channels
Outside of their vast branch networks, Chinese banks have yet to take full advantage of other distribution channels. Despite the development of online, telephone and even mobile banking services, take-up by the wider Chinese population has been slow. This is not surprising, says Yan at Moody's, given China's relatively undeveloped technological sophistication, large rural populations and nascent consumerism. "We're at an early stage," she says.
CCB reported last month (see FSD 112) that it picked up 10 million new online banking customers in 2004, but a recent report by Financial Insights, a research and advisory firm, concluded that regular online banking usage in the country was still very small.
Figures from Financial Insights show that despite an increase in the number of online banking users in 2004, China as a whole had only 12 million users (out of a population of 1.29 billion) who logged into their accounts monthly, indicating that online banking and online payment in the country have yet to really take off.
Given China's size, the potential benefits of new distribution channels, especially virtual ones such as mobile and online banking, cannot be overestimated. Chinese banks have begun the expensive and complex process of rolling out multichannel services but it is still early days, as Yan at Moody's says. ICBC, which has the largest customer base of all China's banks - 100 million personal clients - offers a range of multichannel distribution including self-service banking, telephone banking, mobile banking and online banking. In 2003, total e-banking transaction volumes hit CNY22.3 trillion, the bank says.
Last December, CCB and telecoms company China Unicom jointly rolled out a new generation m-banking service which offers the bank's customers balance enquiry functions, account transfers (including transfers between a client's account and another person's account), remittances, transfers between banking and securities accounts, and foreign exchange services (providing market trends, market orders and entry orders).
Affluent customers will drive competition
One growth area for Chinese banks has been the development of funds operations and distribution. CCB says that, as of March this year, it has acted as the sales agent for 26 open-ended funds, making it the leading distributor of such products among domestic banks. In all, the 26 funds had a sales volume of over CNY31 billion. The bank says that it has invested in widespread training of its staff, teaching them how to sell these funds and how to serve customers. The latest fund to go on sale was a money market fund from China International Fund Management at the end of March - Chinese investors could enquire about and subscribe to the fund at more than 14,000 CCB branches.
Indeed, the development of a domestic funds business is another key aspect of the Chinese government's reform of the country's financial services industry. At the start of April, the central bank selected three pilot banks to launch stand-alone fund management companies. The three lenders are the ICBC, CCB and BoCom - so far, China's commercial banks have been allowed only to sell mutual funds or provide custody, not actually run distinct investment houses themselves. The central bank is expected to grant final approval allowing the qualified banks to set up fund management firms by the end of September 2005.
Developing strong funds businesses will certainly help Chinese banks attract what many commentators are saying will be the country's key market segment: the Chinese affluent market. Distribution will be focused on this key market segment over the coming decade, says Yan at Moody's. "Competition from Western banks for retail deposits will bring pressure on Chinese banks, and this competition will be most felt in terms of the most lucrative market - high-end wealth management."
Even Zhou Xiaochuan, governor of China's central bank, made clear in his speech last April that this will be the most bitter battle ground for banks - though it will help push through reform of the country's financial markets. "These high-end customers can produce almost 80 percent of the total profits. Although China's banking industry boasts an extensive service network and broad customer base, there will emerge big problems if they fail in the competition for high-end customers," he said.
McKinsey study
This was also the conclusion of a recent McKinsey study on the retail banking market in China. "The shift in the profit mix from corporate to retail gives foreign banks a golden opportunity to tap into the Chinese banking market by targeting affluent customers, much the most attractive segment. Their financial needs are diverse, and they account for the vast majority of auto, mortgage, and personal lending balances," says the study.
Although they make up a mere 2 percent of the retail customers of Chinese banks, the mass affluent sector accounts for as much as 55 to 65 percent of retail banking profits. It also accounts for 18 percent of all customers and for 40 to 50 percent of retail banking profits, whereas the 80 percent of customers in the mass market segment are largely unprofitable.
McKinsey adds that the creation of wholly owned branch networks is likely to be a critical component of a winning strategy for Western banks because they provide a quick and easy platform for customer access.
Leading foreign banking groups such as Citibank and HSBC are building their own branch networks in central locations (for instance, the Bund and Pudong financial districts in Shanghai) to lure top customers.
Credit cards is a key growth market for retail banks, says the consultancy, and is a prime example of the mutual benefits of early partnerships between Chinese banks and Western ones. Of the retail lending products in China's banking market, few will grow more quickly, says McKinsey. According to its estimates, revenues from interest income and merchant fees will rise by more than 50 percent annually, to reach $5 billion by 2013.
Although the terms of China's agreement with the WTO prevent foreign players from issuing local currency cards on their own until 2007, "if they wait until then attractive customers will probably already have one or more cards from domestic banks".
Come 2007, Western banks will be free to take local currency deposits and to offer renminbi-denominated credit cards, mortgages, and other personal-lending products in a market where profits are likely to grow by 30 percent a year, according to the McKinsey report. They will also have the right to market other products, such as life insurance and mutual funds.
Yan at Moody's says that it is too early to tell just how successful non-Chinese banks will be in China - limited to a 20 percent stake in any one Chinese financial company until 2007, "they do not have control," she says.
"But with 2007 looming, many banks are getting in now before it's too late. As was recently said by one bank, 'it's risky to be in China, but it's riskier not to be in China'."Financial Services Distribution
