truths of the chinese banking industry

8/3/2019 Truths of the Chinese Banking Industry

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of theTRUTHShe Red Paper Series

Chinese Banking Industry



Asia Pacific markets, with China in the lead, will likely provide the

greatest opportunities for global financial services companies looking

for future growth. For the past five years, economic growth has been

driven by strong consumer demographics, political and market reform,

and economies of scale in production. It is fair to say this trend will

likely perpetuate.

Although many Asian Pacific countries are at different stages of devel-

opment, they have the potential to become major growth markets for

traditional banking, investment banking, investment management,insurance, and securities products. As a result, leading international

and regional banks are likely to want to establish a presence there

and have been making inroads towards understanding and earning

the trust of these prevalent markets.

There are a few key trends, in addition to GDP growth, that improve

the importance of the region to the banking sector. The region is expe-

riencing an increasing concentration of wealth. In countries such as

China, savings rates are significantly higher than in Western countries.

A growing middle class with higher disposable income increases theneed for more sophisticated financial services, as consumers decide

how to delegate their new found surplus.

This savings rate is a key distinguishing factor that increases the

attractiveness of Chinese retail banking markets. The typical savings

rate in China (at 40 percent) is substantially higher than in most North

American or European countries, a factor that will lead to continued

growth in bank deposits. This explosive growth in bank deposits in

China creates vast opportunities for retail banks in everything from

mortgage lending to market specific financial instruments.



Global banks, such as Citigroup and HSBC,

have gained a significant presence in China, built

on decades of experience catering to retail con-

sumers, establishing retail banking infrastructure,

and leveraging teachings learned about consumer

behavior to polish their retail banking capabilities.

This experience, combined with the fact that these

foreign banks have hands-on insight into Chinese

retail consumer patterns, creates a formidable

challenge for China’s domestic banks. This chal-

lenge comes at a time when China’s banks arelooking to focus on the retail consumer to

continue to drive profit growth.

Retail banking will see a rise in demand for prod-

ucts from insurance to credit cards. China’s fast-

growing middle class will drive retail banking and

present opportunities for financial services firms.

To stand out, retail banking requires banks to put

the customer at the core of their strategy. The

customer-centric approach is the most effective

way to attract and retain the most lucrative cus-

tomers, while continuing to ‘cross- sell’ other

products and services. Successful retail banks

will likely develop their strategy to consider many

customer segments, a vast product portfolio, and

various channels of distribution. Essential to the

success of the strategy is an underlying theme

that always exudes stability and reliance.

Yulu believes it is more relevant for financial institu-

tions to find where their strengths and their clients’interests intersect than it is to offer all services to

all customers. Chinese as well as foreign banks

have inherent structural and experiential advan-

tages which should help overcome the challenges

in developing and delivering products to the nou-

veau riche in China.

The combination of a high savings rate

combined with a lack of reasonably safe and

managed investment provides both foreign and

domestic financial institutions with significant ga

for development. The foremost caveat is the sco

of the country in addition to its population and t

idiosyncrasies in dealing with the Chinese client

The economic growth achieved in China has pro

duced an increasing number of people exceedin

the traditional measures of “high net worth”. Whthe types of products and the way services are

delivered to Chinese customers may ultimately

differ from European and North American marke

the differentiators among services providers will

not. High net worth individuals demand superio

customer service and superior returns; however

they may define these terms. Private banks are

targeting these high net worth individuals in

China, and domestic banks are increasingly offe

ing innovative products that are beginning to loo

more and more like private banking.

The successful banks and financial services inst

tutions in the wealth management sector will be

those that take the key lessons learned from els

where and apply them to the culture of China.

Banks and financial institutions will claim their

biggest rewards if they can create:

• A customer-centric model tailored to their clients

• A complete array of best-of-breed products that offer

attractive returns, balancing this against the risk tolerance

of clients

• A seamless infrastructure and communication platform

that enables "up-to-the-second" information and transac

efficiencies

• A pool of world-class talent with well-rounded

technical knowledge as well as with cultural affinities

to Chinese clients.

• Trust



The growth rate of the Chinese economy demands that corporations continuously seek

additional capital. The numbers and value of new issuance each year in Shanghai,

Hong Kong and other places around the globe is overwhelming. Foreign investment

banks have dominated the offering process. Until recently few Chinese banks had led

the share offering process, it is now not uncommon for these institutions to play a more

significant role.

As Chinese corporations merge with and acquire companies in China and abroad, they

will seek advice about the transactions. The foreign investment banks will continue to

be very competitive, but China will quickly produce institutions that will compete with

the traditional investment banking powers. Chinese corporations will likely feel more

comfortable hiring a Chinese advisor in addition to the foreign investor until enough

cross-border transactions are completed to allow corporations to gain confidence intheir ability to manage the global investment banks. Branding and track record will

be of utmost importance to maintain and generate revenues.

Financial institutions in China have a short history of trading derivatives with Chinese

businesses. Credit, fixed income and foreign exchange derivative trading came into

existence in China only recently in 2004 and have quickly expanded into significant

revenue generators for both domestic and foreign banks. Typically foreign institutions

dominate the market due to better risk management, faster product innovation and

more sophisticated trading systems. While foreign institutions do appear to have

advantages, the domestic institutions have gained by being able to hedge exposure

to risk which is often an asset held near and dear to the typical Chinese investor whois inherently risk adverse.

Successful banks and financial institutions in China should not have universal banking

as their target. Rather, they will grow to be a universal bank by adeptly meeting diverse

customer expectations with timely and innovative products and services. The best

news is the consumer will have more and healthier choices due to the competition

between domestic and foreign banks. The future for banks in China will stem from

leveraging the untapped wealth and sophistication of the modern Chinese investor.

truths of the chinese banking industry

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