The business of foreign banks operating in China is booming and will continue to expand, with a growing Chinese middle class, soaring foreign investment and the opening up of the regulatory environment, says a recent report from PricewaterhouseCoopers (PwC).

 

The report, called "Foreign Banks in China", is based on in-depth interviews conducted between January and March with CEOs and other top executives of 40 foreign banks operating here.

 

These banks believe there's a huge development potential with China's rapid economic growth, with only a few predicting the country won't be able to maintain the strong growth until 2010.

 

Over 80 percent of the banks surveyed said they expect their business in China will grow by at least 20 percent this year.

 

Among them, four banks predict an annual growth rate of more than 100 percent and 10 anticipate a 50-100 percent growth in 2007.

 

For the period stretching up to 2010, only four banks forecast an annual growth lower than 20 percent.

 

In terms of profits, the report found that the performance of foreign banks has improved since 2005, when PwC's first survey on foreign banks in China was conducted.

 

Half of the respondents said their profits have been greater than expected during the past three years, compared with 40 percent in the 2005 survey.

 

The optimism of foreign banks is evident. All the banks surveyed predict their profits will be higher in the next three years than today, up from 85 percent in the 2005 survey.

 

Total assets of foreign banks are expected to double to over $100 billion by 2010.

 

The survey shows the market potential and higher profits are encouraging expansion and new entries, the report said.

 

By the end of 2006, 74 foreign banks had established branch operations in China and another 186 had representative offices. But only one-third of those surveyed said the market is overcrowded.

 

Organic growth remains the most attractive option of foreign banks to increase their market presence here, the report found. Partnering with a joint stock commercial bank is the second-best option.

 

Creating a new financial entity ranked third. There seem to be more takers for this route than in 2005 because of the government's policy to encourage local incorporations, adopted late last year.

 

The banks surveyed said the impact of local incorporation will have far-reaching implications, particularly in areas of capital requirements, supervision, transparency and product opportunities.

 

The majority of respondents predict 20 to 30 foreign banks will incorporate locally by 2010. But not all banks deciding to register as a local entity are aiming at retail business.

 

By the end of May, about eight banks including HSBC and Citi have established local entities, with most headquartered in Shanghai. A few more like JPMorgan have applied for the same.

 

Six banks that aim to develop retail banking business in China also plan to boost their retail customer base to over 100,000 by 2010. In terms of products, they will focus more on credit cards, investment products and mortgages.

 

A major challenge for foreign banks is staffing. The 40 banks together employ some 16,752 but this number is expected to grow to 35,685 by 2010, a whopping 113 percent rise.

 

"Many foreign banks are supporting their expansion in China by importing trained personnel from within their banks," said Raymond Yung, PwC's Financial Services Leader for China.

 

"There are already almost 3,000 expatriates working in the industry. Over the next three years, the banks surveyed plan to add another 639."

 

Another challenge is the regulatory environment. Many foreign banks remain critical of the regulatory issues, particularly in areas of coordination, consistency and clarity. They are also frustrated by the lack of credit history in China.

 

(China Daily June 8, 2007)