Recently Taiwan's Financial Supervisory Commission, the main financial regulator, said it had approved applications submitted by Bank of China and Bank of Communications to establish branches in Taipei. The banks will only be allowed to engage in limited business in the country, e.g. can only accept deposits higher than NT$3 million (US$100,350), only provide corporate loans. Further, the banks will need to receive approval from Taiwan's central bank if they wish to engage in f/x.
In recent years, Chinese banking sector profits have skyrocketed to new levels, in part due to the Beijing imposed ceiling on the rates banks pay depositors, providing banks with a source of cheap funds, which banks then in turn lend out at much higher rates. Net profits for commercial banks grew 36 percent last year, reaching 1 trillion Renminbi. Chinese banks are enjoying year-on-year rises of more than 30 percent in their first-half net profits. In one example, the Industrial and Commercial Bank of China’s fees and commission income for the year 2011 was close to 100 billion RMB, compared to 72 billion in 2010 and 55 billion in 2009.
Since the first QDII quota of US$500 million was allocated to the HuaAn fund in 2006, the quota allocated to security companies and fund companies has maintained steady growth. As of the end of February 2012, US$44.4 billion of investment quota was allocated to fund companies and security companies, compared to US$44.4 billion and US$40.6 billion for 2011 and 2010.
In recent years, since Chinese banks have been working on data consolidation at the national level, the establishment of disaster recovery systems has become one of the key considerations for banks. Today, banks must ensure the stability and security of their national data center in the event of a disaster to ensure uninterrupted business operation through disaster recovery systems.
According to IDC’s report “China Business Continuity and Disaster Recovery Market Forecast, 2008-2013, data disaster recovery service and business continuity in China is expected to become the fastest growing segment in the local IT service market during 2008-2013, with a CAGR of 52%.
The importance of disaster recovery systems has pushed the Chinese government to formulate a series of industry standards. In June 2009, the China Banking Regulatory Commission issued a new guideline on IT Risk Management of Commercial Banks, which has set a higher standard for the information security and business continuity of the entire life cycle of banking IT.
In 2011, China’s regulators also urged local banks to speed up the implementation of disaster recovery systems during the 12th Five-Year Period, by proposing a disaster recovery model named “Two Places and Three Centers”, which specifies a main data center, a remote disaster recovery center, and an intra-city emergency disaster recovery center.
In response to the legislation, recently, more local banks have started building their own “Two Places and Three Centers”. Large domestic banks have been seen allocating more resources to develop the disaster recovery model and already built large disaster recovery centers. The Agricultural Bank of China initiated its Shanghai remote disaster recovery center in 2012; China Construction Bank will complete the establishment of its Beijing data center in 2013. Even though they are somewhat behind the larger banks, small and medium banks have identified “Two Places and Three Centers” as one of their key IT investment priorities in the future.
In 2012, we expect that local small and medium sized banks will lead the demand for disaster recovery systems, particularly for joint stock commercial banks and city commercial banks, as they seek national expansions in their next phase of growth. With increased operating risks, banks have begun to put more value on the benefits brought by disaster recovery systems, which will be key to ensure uninterrupted business operation and improve risk management capability. This trend is also likely to be seen in local insurance and securities sector, where more small and medium sized insurers, securities firms and fund companies will invest in disaster recovery systems.
Compared to self-built disaster recovery centers, outsourcing services on disaster recovery will be much more popular among these companies, as the latter can provide lower investments, shorter construction period and higher service standards; the local market for disaster recovery system is still dominated by global players represented by IBM, HP, Symantec and EMC.
As China’s financial institutions continue to invest more money in information technology innovation to help them maintain strong growth and a competitive edge, foreign vendors expect enormous opportunities and are scrambling to enter this dynamic market.
However, when a foreign vendor and its local partner want to implement a new solution, both of them may face a dilemma or, specifically speaking, a real problem, in that China’s financial standardization lags behind the relatively rapid development of the financial industry globally and has yet to meet the demands of technology innovation and business expansion. This can slow the pace of technology advancement as competing standards add layers of complexity and make it more difficult to come up with straightforward technology solutions to clients’ problems. The PBOC has realized that financial standardization does and will continue to play a pivotal role in financial informationization and regards standardization work as an important strategic measure to promote China’s financial industry.
The China Finance Standardization Technical Committee (CFSTC), established by the PBOC and other financial institutions, shoulders the responsibility to draft and revise financial standards relating to banking, insurance, security and printing, and it also promotes the adoption of new standards in China. As of the end of 2011, CFSTC had issued 151 financial standards covering fundamental data elements, code, interface standards, terminology, messages, data, financial instrument designs, and parameters in printing technology. These standards have been successfully implemented in various financial areas such as bankcard, Internet Banking, accounting, treasury, information security and financial IC card.
Take for example the ISO 20022 standard, a universal financial industry message format. Since China has become a member of WTO, the scope of China’s financial institutions’ business has become much more international than before. However, incompatible financial message formats increase the cost of international transactions and impede efficient global bank connectivity, so the PBOC has already urged China’s local banks to adopt the ISO 20022 financial message standard and, at the end of 2011, CFSTC also issued the ISO 20022 standards which will be officially implemented in May, 2012.
We can expect that local banks will obtain numerous benefits from the implementation of ISO 20022 in China including the reduction of transaction costs and improvement of risk control. Vendors, of course, will be happy to help banks upgrade their cash management, treasury and payment systems.
Although progress has been made, China’s financial standardardization still faces many problems and challenges:
As China becomes further integrated into global financial markets and reformation of domestic financial markets continues during the 12th Five-Year Plan Period, the authorities realize that they should continue pushing financial standardization and, more importantly, participating more actively in the drafting of international standards. By submitting its own proposals for international financial standards, China wants to strengthen its competitive edge in global financial markets.
Although it seems difficult for China to exert influence on international financial standards over the relatively short period of time that China’s markets have been developing, CFSTC will keep tracking and learning international standards first and promote indigenous innovation at the same time. In the future, we will likely see some of China’s own financial standards become international standards.
A sizeable portion of Chinese customers are willing to try new methods that may offer them increased convenience over the current need to go to the branch for any problems. Due to the sluggish pace of personal banking in China, consumers have shown added interest in electronic services that will shorten the time they spend in any bank branch. Chinese consumers have also expressed interest in using the internet more in finding out about new products and services as well as using the internet more in addressing account problems.
Among the report’s insights, was the finding that in both the United States and China, a low level of trust in system security remains a considerable obstacle for the integration of social media in banking. Although Chinese consumers seem to be slightly less sceptical than their American counterparts, both groups are unconvinced that social media is a safe route through which banking transactions can be conducted. Although if consumer confidence can be instilled in the safety as well as the privacy factors in social media, both groups would welcome a more technologically advanced system since they believe social media can make their banking experience more expedient and convenient.
With hundreds of millions of individuals in both China and the United States partaking in social media activity each and every day, possibilities of combining social media with other aspects of life are constantly being discovered and experimented with. The key to a successful implementation is the correct assessment of the public’s level of readiness before taking swift action to modernize.
Kapronasia’s latest report “Social Media and Banking in China” takes a comprehensive look at how social media will change the personal banking landscape in China as well as the attitude both American and Chinese consumers hold toward the use of social media in the future. This report, the first of its kind in examining the realm of social media and banking in China, lends many key insights critical to understanding the thoughts and actions of Chinese consumers. These and other findings will be discussed in detail during a Kapronasia webinar on the Social Media and Banking in China” report in early April.
One of the most interesting parts of doing market research in China is learning about the innovative ways of doing business. A few weekends ago the fracas over the China launch of the iPhone 4S at the Apple store in Beijing got me thinking. If you haven’t followed the story, basically, the store was meant to open in the morning and people had queued all night for a chance to buy one of the new phones. The store eventually never opened that day with Apple citing staff safety concerns much to the ire of the people who had braved the cold.
If you look at pictures and reports of the event, it’s clear that many of the people who were queuing and waiting were not necessarily the typical iPhone user. Many of them are in fact what are called huangnius (yellow cows) who are the scalpers who buy the iPhone 4S at retail for about US$790 (as compared to US$650 in the US for a 4S 16GB unlocked) and then sell it on the gray market for a 20%+ markup.
Huangnius are not just limited to electronics though. Actually the first that I had heard about them was when I arrived to shanghai a number of years ago and wanted to exchange RMB for USD. You can go through the banks, but as the currency is capital controlled, you are limited to how much you can convert. No limits to the amount of RMB the huangniu will buy though, of course you’ll have to take his rates, but if you need the USD, you need the USD. The award for best business model though, has to go to the huangniu that are involved in the pre-paid card industry.
As we discussed in previous commentaries, pre-paid cards in China are very popular and are often given by companies as part of an annual bonus to their employees. A key part of that equation are the ‘fapiao’ or official invoices that they receive for the cards. In order to account costs in China, you need to have an official fapiao that is submitted to the tax authorities to show that you actually did incur an expense and aren’t just faking invoices. There are of course ways that companies counterfeit fapiao or buy actual fapiao, but that is a whole separate subject.
Back to the prepaid cards and the huangniu, so in the west, there are of course a number of companies that will give you money today for your money tomorrow. Similarly, the huangniu openly purchase pre-paid cards. So let’s go through how this whole process works:
A large company, let’s call it ACME, will purchase a number of prepaid cards from a prepaid card issuer such as a large retail store chain for typically what is the actual face value of the card, let’s say 1000 rmb (renminbi or rmb for short is another name for Chinese Yuan; 1000rmb is about US$150). ACME will pay the issuer and receive the official receipts (fa piao) from the issuer and be able to claim either as a business or salary expense depending on ACME’s accounting and then will give the cards to their employees as part of their annual bonus or just as part of their regular compensation.
Now, say the prepaid card is only good at the issuer’s store and the ACME employee who received the card rarely shops at that store, or just really needs the money right away. They can then contact a huangniu who, if it is a popular kind of prepaid card, will buy it off the ACME employee for a certain percentage of the original value, let’s say 800 rmb in this case. The huangniu at that point has a number of options including reselling it to an individual consumer who might be interested in the card for say 900rmb, thus making a 100rmb profit. This makes a lot of sense, and when it was explained to me, wasn’t surprising.
What was surprising to me in this case is that the huangniu will sometimes sell it back to the issuer themselves. So think about this, the issuer has sold the card for 1000 rmb and immediately that becomes a liability for the company (similar to a loan for a bank) as the user can then use that card to purchase goods. Not trying to make things overly simple here, but what the issuer would love is that the users never in fact use the cards and they expire along with their complete value. That 1000rmb suddenly moves from being a liability to a cash asset. If that isn’t possible, the issuer would want to get the most value back from the card as possible.
So to do that, the issuer will actually buy the unused card from the huangniu at a slight discount. So in this case, say it was 900rmb. So the issuer has cleared off 1000rmb of liabilities for 900rmb and everyone in the ‘value chain’ is happy. The issuer is happy as they make a tidy profit and are then able to reissue the card at the same 1000rmb value which accelerates the ‘velocity’ of the card in the market so that it appears more popular. ACME is happy because they have compensated their employees and have received official receipts which they can then deduct from their tax bill. Employees are happy because they have 800rmb in cash. Huangniu are happy because typically the sellers are buyers of these cards are fixed which means steady regular and predictable profits.
The values used here are just examples. From others in the industry it seems that these arrangements happen for as little as a 1rmb discount on each card. So the huangniu will buy the card for 99rmb instead of 100rmb and then sell it for 99.5 rmb or similar. Even with such a small discount, they still manage to make huge profits through volume.
The key takeaway from all of this is that China is developing rapidly and many of the regulations in and around the finanancial services industry are somewhat vague and often allow for loopholes similar to the model I laid out above. These inevitably will be sorted out in the future, but for now, it is another example of the inventiveness of the market players and the lack of specific regulations preventing what is essentially a huge tax dodge and license to print money.
Based on numerous conversations with clients and industry participants, we have finalised and published Kapronasia's 2012 Banking research calendar.
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.
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.
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.
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.
Recently there seems to have been an increased focus on the presence of foreign banks in China and their domestic China businesses. There was an article in the WSJ last week that mentioned the number 86% which represents the increase in foreign banks' lending in China in 2010. A webinar from Celent talks about how JVs/partnerships are still the way to go in China for foreign banks.
Yesterday was the 7th Annual BFTF which was held at the Traders Hotel here in Singapore. The event featured around 20 international speakers, 8 sponsor/vendors and was attended by about 100 delegates. The event, although smaller than in previous years – and smaller than similar events, was excellent. I was expecting the conversations to be thought-provoking, but was genuinely impressed by some of the debates and discussions.
As the world economy recovers from the deep hole of the financial crisis, institutions in Chinese financial markets, like their counterparts in the west, are looking for ways to improve their efficiency through technology. This drive for efficiency is bringing Cloud computing into the spot-light and the idea that computing will increasingly be delivered as a service, over the internet, from the vast warehouses of shared machines – a new way to meet the demand for efficiency improvement.
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.
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.
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.
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.
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.
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.