This week Singapore Airlines (SIA) bought a ~16% stake in China Eastern, a domestic Chinese airline, which is in the worst financial condition of the big three Chinese carriers. This by itself is groundbreaking news as it’s the first foreign investment in a domestic Chinese airline, but when you consider the recent takeover bid for Qantas in Australia and indeed SIA’s own failed bid for takeoff slots in Australia, it becomes even more interesting as a comparison of markets and their openness to change.
A few days ago, the Beijing Municipal government (separate from the national government) issued a report promoting the capital city as a new back office operations centre for the financial sector. Using a raft of incentives such as discounts on registration payments, and subsidized housing and land, Beijing is looking to attract all types of back functions to four new specially designated zones in the capital. Apparently Goldman Sachs / Gao Hua Securities, “Swiss Bank” (?) and Deutsche Bank have been in discussions about shifting some of their back office work there; the People's Bank of China, Agricultural Bank of China and the R&D arm of China Life Insurance Company have already signed contracts to relocate to the financial zone.
The People’s Bank of China (PBOC) has hiked the reserve requirement by 50bps, to 12%, effective from August 15. The reserve requirement rate is now approaching the threshold of 13%, common back in 1988-98. This is the fifth time that the PBOC has tightened the reserve requirement policy this year, the last being a hike on July 20th.
Non-performing loans (NPLs) have been the monkey on the back of Chinese banks for years. Previous to 2001, NPL rates weren’t as big of a concern for the banks as they were all fully state-owned and competition was weak. China entering the WTO changed that. As the industry started to open up, competition increased and banks considered public listings. Cleaning up their low-quality balance sheets was one of the first steps on the road to IPO.
Beyond satisfying WTO requirements, one of the key rationales for allowing foreign multinational banks to buy into Chinese financial institutions was to leverage the investors’ experience to develop a more mature set of regulations and financial industry as a whole. With the slowdown going truly global, we are starting to see multi-national banks start to pull out of China; RBS and UBS have sold off stakes in their Chinese investments, it’s likely that many other banks will do the same in the coming months. This poses a big challenge for Chinese banks.
Prior to joining the WTO, the knowledge and experience of bank staff in Chinese banks was not an issue. Most domestic banks were very inwardly focused on their core domestic business and staff had the capabilities to match. However, as more and more SOEs were either listed or entered into partnerships with foreign multi-nationals, the requirements of domestic companies changed and expanded. No longer was it a case of simply domestic business - China had gone global. The issue then became staff experience and capabilities and as most Chinese banks didn't have the experience in-house, so they looked west.
In recent years, with the development of information technology and the demand of innovation in the micropayment market, China’s commercial prepaid card industry has grown rapidly. By the end of 2009, the total funds of prepaid cards in circulation reached 1,093 billion Yuan, with 1.75 billion transaction volume and a stored value totaling nearly 40 billion Yuan, according to a report filed in July 2010 by China Union Loyalty Co Ltd, a Shanghai-based provider of prepaid cards.
Frequently companies issue press releases talking about a new agreement or MOU with a Chinese financial institution or market player. As Chinese companies globalize and more foreign companies setup offices in China, announcements like these are becoming more common, it is worth taking a minute to reflect on what MOUs or agreements actually mean both inside and outside of China.
Anyone who has lived long enough has their own China banking story. Mine was when I first arrived many years ago. My landlord banked with Bank of China (BOC) and I banked with the Industrial Commercial Bank of China (ICBC). At that time (2004), personal bank to bank transfers weren’t possible without a tremendous amount of paperwork, so once per month I would have to directly pay my rent via withdrawal / deposit. As banks typically closed at around 5pm, this meant it was a weekend exercise and one not easily accomplished.
This week we are attending the Sibos Toronto event which is put on by SWIFT. The event is arguably the largest financial services event in the world, bringing together banks, technology vendors and industry thought leaders.