8/3/2019 Truths of the Chinese Banking Industry
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of theTRUTHShe Red Paper Series
Chinese Banking Industry
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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.
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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
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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.