November 27,2007

Giant Strides Must be Made

By Ma Wenluo
A new round of reforms is bringing strategic change to China’s commercial banking industry.  2007 has seen the rise of two noticeable phenomena-continuing strides in the move towards universal operation; and encouragement in cooperation and joint ventures with foreign financial firms

Previous reforms by the China Banking Regulatory Commission (CBRC) now permit commercial banks to involve themselves in fund companies, the financial trust business, financial leasing, and the industrial fund business, with the insurance business a good possibility in the near future.

In the fund business, the CBRC issued rules concerning the founding of fund management companies in February, 2005. In June the same year, the Industrial and Commercial Bank of China (ICBC), teaming up with Swiss giant Credit Suisse, founded the ICBC Credit Suisse Asset Management Co., Ltd., China’s first commercial bank-run fund management company.   China Construction Bank (CCB) and Bank of Communications (BOC) quickly followed suit.  In 2007, Shanghai Pudong Development Bank (SPDB) and global financial group AXA established the AXA SPDB Fund Management Co., Ltd., the Agricultural Bank of China (ABOC) and France’s BNP Paribas set up the ABOC BNP Paris Co., Ltd., and China Merchants Bank (CMB) founded the China Merchants Bank Fund.  In addition, China Minsheng Bank, the Industrial Bank of China, the Bank of China and China Everbright Bank are all eager to enter the business.

The BOC became the first commercial bank to engage in the financial trust business since 1993, with its June, 2007 purchase, with approval by the CBRC, of 85% of the shares of Hubei International Trust and Investment Co. Ltd., renamed the BOC International Trust and Investment Co. Ltd., for RMB 1.22 billion.  Then in October, CMB formally announced its agreement to acquire 26.58% shares of Shanxi International Trust and Investment Co. Ltd., at the cost of RMB 2.342 billion. At a stroke BOC and CMB have become commercial banking leaders in the financial trust business.

In Dec. 2006, Bank of China stepped into the financial leasing business through buying 100% shares of Singapore Aeroplane Leasing Co. Ltd. for USD 956 million (approximately RMB 7.2 billion).  New rules from the CBRC governing financial leasing companies went into effect in March of this year, and such companies founded or funded by banks have appeared. The CCB and Bank of America have been approved to found a joint venture financial leasing company, and the applications of BOC, ICBC, CMB and China Minsheng Bank to found financial leasing companies have also been approved.
 
The Bohai Industrial Investment Fund, the first RMB industrial investment fund in China, started business in January, 2007.  Founded partially by the Bank of China, its chairman is Li Lihui, the Bank of China’s president.  The Bank of China became the first large domestic bank to engage in industrial investment banking.  Previously, in May, 2005, China Development Bank had gotten its toe into the water with the establishment of the Sino-African Development Fund.
 
Moves by the banks into the insurance business are not lagging far behind.  HSBC, a Hong Kong titan, received approval in September to establish and take a 50% share of a joint venture insurance company and is leading the way for other domestic banks.  Word has it that CCB and Pingan Insurance Company are planning another joint venture insurance company, China Everbright Bank (CEB) is planning to found a joint venture property insurance company, BOC and Bank of China are also planning their own joint venture, and CMB is expected to establish CMB Xinnuo Life Insurance Company.  Insurance company capital is also pouring into the banking industry.
 
Beyond all these moves are others.  It is reported that ICBC is planning to fully acquire or take a controlling share in China Huarong Asset Management Corporation (CHAMC). If the merger succeeds it will become an important part of the corporation as CHAMC’s business licenses (securities business licenses, etc.) will be incorporated into ICBC. ICBC’s Hong Kong subsidiary, ICBC Asia, has already become an important investor in china.alibaba.com.   In addition, it is reported that Bank of China, ICBC and CCB will invest in the Beijing-Shanghai High Speed Railway Co., Ltd., and that ABOC and CDB are planning to found a bank serving China’s vast and underserved countryside.
 
Since 2003, reforms to the banking industry by the CBRC have improved the overall competitiveness of China’s banks substantially, and promotion of a more universal operation in direct financing is preparing them for the approaching great competition from foreign funded banks.
In a meeting held in Beijing at the end of October, Chinese bankers agreed that, for survival and development, their industry must extend beyond its original business scope and into other fields.  None of this is without risk, but giant strides must be made.  The traditional loan business by itself just doesn’t cut it anymore.

(Ma Wenluo is the deputy director of  the Institute of Dredit Research of Shanghai Academy of  Social Sciences and a senior executive of a credit rating company in Shanghai. He holds a Bachelor and a Master in economics.)

 

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