Foreign Banks In China Begins To Handle Yuan Deposit, Loan
SHANGHAI -- More than 20 years after the world's leading banks opened outlets in China, a handful are set to grasp a long-sought prize: deposits in yuan from ordinary citizens.
Today, for the first time, Citigroup Inc., HSBC Holdings PLC, Standard Chartered PLC and Bank of East Asia Ltd. intend to begin accepting deposits in yuan from Chinese individuals, and offering loans as well. Until now, China's tight controls over foreign banks have made it impossible for them to offer those basic -- and much coveted -- services.
"The key point is this is the final piece of the liberalization promised" by China under its World Trade Organization obligations, Richard Yorke, HSBC's China chief executive, said in an interview. "Now, the market is opened. We can start taking deposits from any customer."
Bankers consider the money that China's high-saving households have deposited in banks -- more than $2 trillion -- as one of the industry's richest opportunities anywhere. But it has long been denied to them, as China's government owns virtually all banks in the nation, and it has protected them from foreign competition.
To become eligible for the operations being launched today, each foreign bank has undertaken a vast restructuring that was mandated by local regulators. One provision, the establishment of a legally incorporated holding company in China, was a lengthy process that left uncertain when the long-promised access would actually be permitted.
According to details the four banks published in legal notices over the weekend, they have received approvals necessary to open in selected cities. The banks all intend to target relatively well-to-do Chinese citizens.
Bank of East Asia, based in Hong Kong, is casting the widest net of the four, offering potential customers fee-free banking if they maintain deposits above 5,000 yuan, or about $650. It will charge them 10 yuan a month if the balance falls below that level.
Considerably higher thresholds will apply at Citigroup, HSBC and Standard Chartered, likely ensuring only China's richest open accounts with the global leaders. These banks intend to levy monthly management fees of 50 yuan to 150 yuan on deposit balances under 80,000 yuan and 100,000 yuan, depending on the bank.
"Generally they are not here to serve small-money customers," a Shanghai-based official at the China Banking Regulatory Commission said yesterday.
Foreign banks have long had designs on China's citizens, and the entire industry is gearing up with pushes into new cities, ATM network expansions and advertising campaigns.
China's market is appealing for its massive population, a household-savings rate of about 25% and rapid income growth at a stage when consumer finance is in its infancy. The banks hope to capitalize on signs that China's citizens are poorly served by state-owned institutions that dominate the market but have long been shielded from world-class competition.
Nearly half of the 33.5 trillion yuan in local-currency deposits in China's banks at the end of 2006 were from households, some 16.42 trillion yuan. Deposit growth has been stymied by investment in the sizzling Chinese stock market, but it remains high, at 15% in 2006, compared with 18% in the previous year.
The foreign banks that are now permitted to take yuan deposits and give loans must abide by the same interest-rate structure as monetary authorities set for China's own banks. A wide 3.6-percentage-point gap between the rates Chinese banks are currently required to pay in interest on deposits and the higher rate they charge on loans makes it easy to generate interest income. Plus, winning a deposit is a foot in the door to offering individuals other products, such as credit cards.
The domestic banking industry boasts hundreds of thousands of branches. No one anticipates that the four foreign banks starting to have yuan services, with their combined 100 or so outlets, can in the foreseeable future win more than a few percentage points of market share.
Given the limited size of the network, "we have to be pretty focused," said HSBC's Mr. Yorke. Still, he said he is encouraged that over the past 18 months more mainland Chinese than foreigners have opened accounts at HSBC in China.
In the mid-1980s, three decades after Communist officials froze foreign banks out of China, Citigroup, HSBC and other top banks opened business offices. Next came main Shanghai branches, around 1991. But all along, China's government kept the global giants on a short leash, not permitting them to offer the kinds of services that might challenge the positions of domestic state banks.
After China joined the WTO in 2001, the foreigners got wider scope to operate, governed by a timetable of market-access points. First, the banks won permission to offer foreign-currency services to businesses in China. Then, in early 2002, the banks were permitted to take deposits from Chinese citizens, but only in U.S. dollars and other currencies, a niche business.
Bankers have greeted each step as a breakthrough. Even so, the 70 or so foreign banks with branches in China together had less than 2% of industry assets at the end of last year.
China's opening to consumer banking was to culminate in December 2006, five years after the country joined the WTO, when foreign banks were to be allowed to offer the full range of services to all customers, including individuals. Yet, before last year's "big bang," the government announced a caveat: In order to get rights to compete with China's banks, foreign banks would need to be structured in a similar way, for regulatory purposes.
The foreign institutions were forced to pump in more capital, hire extra staff, adjust all outstanding contracts and establish a new holding company incorporated in China. For some banks, the time-consuming restructuring meant redoing more than 100,000 documents such as loan covenants.
When Citigroup cleared a key hurdle this month, China Chief Executive Richard Stanley said in a statement, "Citi's local incorporation in China is without a doubt one of the most significant developments in our long history in this vital market."
Other foreign banks, like J.P. Morgan Chase & Co., have signaled plans to restructure in hopes to better tap the Chinese market, too, but most have decided to focus on corporate banking or operate through local partners.
From: Wall Street Journal, By JAMES T. AREDDY
Date: Monday 23, 2007 Back