China: The opportunity riding the dangerous wind

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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.

There are two main reasons banks are leaving China: 1. needing the capital in other parts of the organisation and 2. seeing a shifting risk/reward proposition.

Capital is in short supply all over the world and banks need to minimize all non-core businesses to make sure the core businesses are fully capitalised. Most investments in China are seen as long-term and in fact very few, if any, multinational banks are actually seeing revenues from their Chinese investments at this point. Any profits are coming from the sales of the stakes themselves; RBS is reportedly making nearly US$800 million from the sale of their share of the Bank of China, however, with not much regular revenue coming in, in makes sense to get out.

China has always presented a riskier proposition than more developed markets, but with a potential 1 billion customers, two years ago, few financial institutions could look their shareholders in the eyes and tell them that they didn’t have a China strategy. So risks were largely overlooked and the land rush started with numerous banks taking stakes in local Chinese financial institutions. This looked like a great move. Non-performing loan (NPL) rates were dropping, customer deposits were increasing, 1st half 08 profits set records - everything was rosy. Then the other shoe dropped.

Much like the coverage in US and European newspapers months ago, nearly every page in Chinese papers these days has some reference to a slowdown in China which is supported by an ever worsening batch of statistics. China is certainly not in a recession, but the risk/reward equation that we mentioned earlier has just shifted: risks have gone up and the potential rewards, will likely be pushed a few years into the future. Customer confidence is dropping, exports have dropped off and domestic consumption will likely follow suit.

So back to the situation with Chinese banks - the question now on the table is: did the Chinese banks learn enough from the foreign banks before they packed up? When the foreign banks leave, they are taking that experience with them which is going to leave Chinese banks in a bit of a tough spot as they face one of the most challenging environments in years. Many of the Chinese banks in their pre-IPO days face stagnant markets and of course growing markets, but they didn’t have to face declining markets. Will they be able to navigate through the cycle? Will they continue down the path to a mature industry or will the bugbears from the past like NPLs come back to haunt them?

It has always a bit unclear how much knowledge transfer occurred between the foreign banks and their local entities. Anecdotally, we’ve heard stories of Chinese banks taking a great deal of advice from their foreign counterparts and giving very little in return. Shared revenue would have been a nice reward for helping out, but in certain cases, the foreign banks didn’t even get to see customer lists, much less any of the money.

“A crisis is an opportunity riding the dangerous wind” – Chinese proverb

So the situation is challenging for the Chinese banks, but it actually opens a door for technology providers. In the next few years, there will be a void of expertise where the foreign banks once stood that Chinese banks will need to fill. A service provider that can fill this gap will be well positioned both during the downturn and afterwards.

So to help providers, we developed 4 key points that are worth focusing on for any vendor looking to take advantage of the opportunity:

Share your experience - As we mentioned above, foreign banks are packing up shop, so leverage your experience in other markets and help Chinese banks find solutions to their problems based on what you've seen in other markets. This is normal in most sales situations, but even more so here.

Be prepared to do some work for free - Likely some of the advice that you can provide on lessons learnt from other markets will be outside of your core project/service portfolio. Be prepared to share that – you need to become an advisor and a consultant to them. Relationships are still very important in China and if you can develop that with a client and then feel they can trust you - you're 90% there. Some free advice/work will help you get there - just make sure you have the relationship in place. Free work with no relationship and you'll just get taken advantage of.

Find even greater patience - Sales cycles in China are notoriously long to begin with and they are going to get longer as we go through the crisis, but the companies that stick with the banks to get through the crisis are going to be the ones that are the ones that banks go to when the crisis is over.

Ensure your solutions match the needs of the industry - This is a no-brainer, but always worth repeating. Now is not the time to be proposing the latest algo trading solution – how that affects the business in the future is the least of the banks’ worries. Focus on today's needs. Also, you'll need to make sure the messaging reflects both this and the nuances of the market as what's acceptable marketing in China is different than other locales.

Economies are cyclical, so eventually we’ll make it out the other side of the global slowdown, but what’s important today is to understand not just the downside of the slow-down, but the opportunities that it opens up.

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