Banking: the real China opportunity
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Opinion

Banking: the real China opportunity

Global banks spent years trying to make China’s vast market work for them, mostly in vain. Today, though, China’s manufacturers are investing in Europe and the US, and turning to Western lenders for advice. The real China opportunity starts here.

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China’s accession to the World Trade Organization in 2001 is widely seen as the moment it started its meteoric economic rise.

But arguably the key moment came two years earlier, when Washington and Beijing signed the US-China Bilateral WTO Agreement. The document is full of stuff that mattered to US business, including promises by China to shred tariffs and eliminate trade barriers.

Financial services gets a big mention. Beijing pledges to give foreign banks “national treatment” – in other words, the same rights as local lenders – with all geographic and customer restrictions “removed [with]in five years” of accession.

It was what both sides wanted. Western lenders got access to a vast new market; Beijing in turn saw the added competition as “essential” to forcing its banks to “undertake badly needed structural reforms”, the China expert Nicholas Lardy wrote at the time.

China got the better half of the deal. Its banks turned themselves around... yet well over two decades later, foreign banks remain at best peripheral operators in Asia’s largest economy

Seems straightforward doesn’t it? I don’t need to tell you, it didn’t turn out that way.

China got the better half of the deal. Its banks turned themselves around, listing onshore and in Hong Kong; today they are profitable, with low rates of non-performing loans. Yet well over two decades later, foreign banks – US, UK, German, French and Japanese alike – remain at best peripheral operators in Asia’s largest economy.

A few have at least some scale. HSBC is in 50-plus cities and offers a reasonably full range of services. In July, it secured a mutual fund distribution licence from the China Securities Regulatory Commission.

But the process of opening branches and securing new licences – pretty much every financial service, from stock underwriting to wealth management, requires its own permit – is tortuously slow.

Marginal operators

This is a key reason why foreign banks account for less than 1% of all onshore bank-sector profits. Had Citi been allowed to enter China unfettered in 2001, winning clients, dishing up a full range of services and posting bumper profits on a regular basis, it is hard to imagine its CEO Jane Fraser being so keen to wind down its onshore consumer business now.

Here is another fact: since the start of 2020, foreign investment banks have been involved in $4.3 billion, or just 1.8%, of the $241.2 billion in capital raised via initial public offerings on the four main onshore stock exchanges, according to data from Dealogic.


In the current year to October 25, foreign banks were involved in just 0.3% of all onshore primary stock-underwriting activities by volume. Again, they are at best marginal operators in the market.

Slower growth and a stumbling stock market is forcing some foreign firms to reframe their aspirations. Morgan Stanley and Goldman Sachs are scaling back hiring and profit targets. So is Nomura, after its mainland joint venture posted a record Rmb225 million ($30.9 million) loss in 2023.

Real opportunity

But maybe global banks have been looking in the wrong place all along for China-related growth and profits. Maybe they just had to wait for geopolitics to tilt in their favour.

Covid changed so many things. Supply chains are diversifying away from China, as global firms seek to cut costs, avoid US tariffs and de-risk by expanding the source of production. The past few years have also seen Washington and Brussels adopting a more protectionist stance, setting out expansive new rules designed to suck in foreign investment.

Chinese firms, notably those engaged in green energy and electric vehicle (EV) production, took note. Keen to get closer to the end-customer, Fujian-based CATL will open a $7.6 billion battery plant, Europe’s largest, in Hungary in 2025. Shanghai-based wind turbine maker Envision is building factories in Spain and South Carolina. Others are opening plants in France, the UK and Germany.

China’s mounting EV ambitions may be bad news for Europe’s automakers, but it’s great news for the continent’s big banks. These firms may know their home market inside and out, but abroad they’re striplings, desperate to know how the rules work.

Foreign banks spent decades trying to crack China. Now, it’s coming to them

“[They] want insights into local regulations. They want to contact local governments, they want somebody to manage their payments onshore, they want someone to help them pay local wages, to set up their bank accounts,” says Matthew Moodey, Asia Pacific head of trade finance & lending at Deutsche Bank. “That’s what we do. That's what we offer.”

In China, Deutsche – like HSBC, Citi or Bank of America – is just another big foreign bank. Its name has cachet, but it doesn’t resonate there like ICBC’s or Bank of China’s, lenders with branches everywhere.

“I’ve spoken to a lot of Chinese companies in the mainland,” adds Moodey. “They say: ‘Look, we don’t need you in China. Chinese banks can offer us liquidity.’ What they do want is our support going into Europe: to help with government financing on the ground, to help secure cheap euros. To support them as they expand in Europe.”

Where, of course, China’s banks cannot compete. They don’t have the network of a BNP Paribas in France or a UniCredit in Italy. To Beijing’s highly capitalized but insulated lenders, Europe is far away and unknown.

“We can take a CATL or an Envision and say: ‘Okay, let’s go meet the mayor of Hanover, let’s have a chat to the European Investment Bank, let’s set up your payment systems, because we’ve got the biggest cash payment system in Europe, and we have all these great operatives at work on the ground,” adds Moodey.

Foreign banks spent decades trying to crack China. Now, it’s coming to them. They’ll never have a better chance to make financial hay from Asia’s largest economy. This is the real China opportunity, and it’s starting now.

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