In recent years, China’s banking sector has gone through rapid changes, driven by deepening financial reforms, growing presence of foreign banks and quickly evolving customer demand. With intensified competition, there is a new wave of investment in core banking systems among Chinese banks, in a hope to sharpen their technology edge and stay ahead of the competition.
Without a doubt when we look back at the year in review for 2010, one of the key industry issues of the year will be that of consumer data protection. With numerous breaches at some of the world’s largest banks and credit card institutions, it’s clear that data privacy and protection is still an issue – and one that is back on the front page this week.
As commonly seen as the nearest equivalent to Paypal in the Chinese market, Alipay, a Chinese online payment processor affiliated with the Alibaba Group, has enjoyed enormous popularity amongst Chinese netizens since its launch in 2004. As of December 2009, Alipay was said to possess over 250 million registered users and to oversee 5 million transactions worth ￥1.2 billion on a daily basis.
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.
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.
With both the Olympics and Para-Olympics now over and the vestiges of Olympic advertising slowly being removed from billboards around China, it is getting back to business as usual in China, or as usual as it could be. For awhile, the feeling was that the Chinese economy would come out of the Olympics, weather the credit crunch and continue on the path of the fantastic growth that China has experienced over the past 10 years. As the situation in the United States worsens, both as a result of the credit crisis and the worsening economic situation, that feeling is changing.
The government of the new Taiwanese President Ma Yingjeou has, over the past few weeks, taken a number of key steps towards financial services liberalization between Taiwan and the mainland that are pointing towards a more integrated financial sector. The two players have always been closely economically intertwined, but there have been many barriers in place that have prevented a more complete integration. Those barriers are now starting to come down.
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.
Taking a step away from financial services for a minute, I thought it fitting to give a view from China of what’s happening regarding China’s recent earthquake. In previous disasters like the SEA tsunami a few years ago or the recent typhoon in Myanmar, I've often found myself detached from the reality of the situation by geographical distance. Although once again I still am to a certain extent, as Shanghai is a distance from the epicenter of the quake, the quake and its aftermath have dominated life in China for the past week and a half.
The Citic / Bear Stearns fall-out is one example of many where proposed or actual tie-ups in China have changed as of late. Another prominent one is Yahoo and their arrangement with Alibaba, the largest B2B website in China. In August 2005, Yahoo invested US$1B for a 39 percent stake in Alibaba, who then agreed to run the Chinese operations of Yahoo. Now with Microsoft on the hunt for Yahoo, Alibaba wants to buy out the Yahoo stake and is looking for financing to do so.
Without too much fanfare, Nokia and China Unionpay recently launched a near field communication (NFC) contactless payments trial in Shanghai allowing users to download a loyalty application over the air to their phones. It’s actually the 2nd trial of NFC in China. The first project was a ticketing and e-cash application loaded onto 100 phones in the coastal city of Xiamen which was also backed by Nokia.
Amongst all of the events happening in China in 2008, without a doubt, the most important item on the Chinese agenda this year is the Beijing Olympics. Seen by both domestic and international observers as a key indication of China’s development, the Chinese government has spared no expense in preparing for the games.
Year 4706, the year of the rat, begins on February 7th in China this year. With the celebration just under a month away, it’s tempting to use the time to procrastinate on making predictions on what will happen in China is 2008 as it’s technically not the new year here yet, but unfortunately, China doesn’t wait.
The Shanghai stock market continues to defy expectations -- up nearly 100% in 2007. Most of the commentary on the Shanghai market depicts the average Chinese investor as unknowledgeable and following the herd. However, a recent study that we’ve (kapronasia) just completed with Amber (www.amberinsights.com) shows that individual Shanghai A-share investors are actually much more market savvy than commonly thought.
According to a recent statistic published by China Union Pay, Chinese banks have issued more than 1.3 billion debit, credit and ‘quasi’-credit cards through the end of September. This means that, on average, every man, woman and child in China now carries a piece of plastic. Quite a staggering number and, at first glance, quite promising.
Two years ago in 2005, GE agreed to buy a 7% stake in Shenzhen Development Bank, which at the time was worth US$100M. However, the deal had been held up due due to disagreements amongst the shareholders, one of which was the private equity group TPG. Most of the disagreements centred around government requirements on share restructuring as the initial agreement would have significantly diluted TPG's stake in the bank. TPG eventually did agree to modified terms, but yesterday Shenzhen Bank terminated the agreement.
Not to miss the ‘invest in China’ boat, yesterday, Bear Stearns and Citic Securities announced a co-investment partnership agreement. If everything is approved by the regulators, which it likely will be, Bear, the darling of the CDO market, will invest US$1B in the Chinese brokerage, which will convert to a 2% stake over 6 years with the option to increase that to 7%. Conversely, Citic will invest the same in Bear, which will convert to 6% stake in Bear over 40 years, and will have the option to increase this stake to 9.9%. Most of the non-Chinese operations will likely be a co-branded operation and it’s yet unclear what the Chinese operation will look like.
For the past few weeks, most of the major news in China has centred on the Communist Party Congress. This is an pretty important event in China that happens once every 5 years and usually results in a number of far-reaching policy and people changes throughout the country and government.
With recall troubles dating back to 2005 when a toddler in the US ate a loose magnet and later died, the toy manufacture Mattel has been in the centre of a toy recall that has thousands of class-action lawyers around the world drooling. The company has gone through numerous recalls in the past few months, the largest being for 18 million playsets plagued by another loose magnet.
This past weekend Craig Barrett was in China for the ceremonial groundbreaking on the brand spanking new site for Intel’s latest US$2.5B factory or “fab”. Scheduled to start production in 2010, the fab is the largest investment by Intel in China to date and represents Intel’s “continued commitment to China."
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.
China, well known for its capital controls made some steps towards loosening those controls for individual investors last month with the announcement that individual mainland Chinese investors would be able to invest in the HK stock market. However, now it appears the implementation will be another few days or weeks off according to an announcement by the Bank of China (BOC).
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.
Reading Bank of China’s ticker last week was a crash course in China’s stock markets. Towards the end of last week, the bank reported on its sub-prime exposure. On the next trading day, if you were given the two ticker symbols for Bank of China (BOC) and their positions, you’d be hard pressed to guess what BOC’s actual position was. In HK, BOC fell by as much as 5.4% over the course of the trading day*, while in Shanghai, the stock actually rose 1% on a day when the entire market rose 5% overall. What happened?
Earlier this week we looked at how the Shanghai market has remained relatively unscathed by the sub-prime meltdown, but what about individual banks' exposure?
Losses through the week in major indices around the world and indeed in emerging market countries in Asia, have chipped away yearly gains that most indices have chalked up this year. China's Shanghai index however is up nearly 78% on the year. How is it possible?