Challenges and Opportunities to China’s Banking Industry

The banking industry in China has the platform for future growth opportunities but often come with strategic challenges. ACMR-IBISWorld forecasts that in the five years through 2021, total assets of the Commercial Banking industry in China will increase at an average rate of 11.9% per year, to $48.2 trillion by the end of 2021.¹ Industry revenue is forecast to grow at an average rate of 5.4% per year to $818.5 billion in 2021.¹ China has become the target of many foreign banks and financial institutions as a result of its huge market size. Other reasons include continuous deregulation, WTO commitments and the improving market conditions with strong fundamentals. However, there are also several main challenges that obstruct the industry’s growth.

Opportunities

• Opening Requirement: According to the China Banking Regulatory Committee, foreign banks accounted for barely 2.3% of total commercial bank assets at the end of the third quarter of 2012.¹ However, in order for China to meet its World Trade Organization (WTO) accession commitments, they are required to further open its banking sector to foreign banks. The easing of restrictions provide an opportunistic window for foreign banks to grow or enter the market.
• Deregulation: Beginning in 2003, China has begun to allow qualified foreign banks to offer RMB banking services to Chinese enterprises. In addition, some restrictions on geographic distribution and foreign exchange services offered by foreign banks have been lifted. Banking services have been opened to overseas banks in 13 cities, up from only 2, Beijing and Shanghai, before China’s WTO entry.¹
• Innovation: In 2006, China officially opened its banking sector allowing foreign banks to conduct RMB business, removing geographical and client restrictions.¹ In 2009, new development opportunities for commercial banks opened up which led to many changes in terms of competition, technologies, product diversification and industry profitability. As a result, domestic banks face increasing pressure to upgrade operations management, internal controls and product and service innovation. Banks with a technological edge or process driven technology can begin creating a strategic opportunity to gain the competitive advantage and market share in China.

Challenges

• Governmental Barrier to Entry: The banking industry in China is known to have high levels of regulation and policy. For companies looking to enter the China market, the requirements for obtaining a license in order to operate as a commercial bank in China are set up through the Financial License Management Rules and approved by the China Banking Regulatory Commission (CBRC).¹ In addition, Commercial banks in China are subject to the supervision of, and regular inspections by, the CBRC. In general, the application for preparing the establishment of a new branch by a policy bank, a wholly state-owned commercial bank or a joint-stock commercial bank shall be filed with and reviewed by the CBRC provincial office in the province where the proposed branch is to be established, and shall be subject to the final approval by the CBRC headquarters.
• Competition: Given the strict government controls and the high level of intervention in the industry, prices are quite regulated and product innovation and diversity are not the main basis for competition. In general, the approval requirements for new products are very strict. They are often the subject of complicated approval processes and lengthy approval times, and as a result are not main competitive factors. China’s banking industry brings heavy competition as commercial banks generally offer similar products at similar prices providing difficult to gain a competitive advantage.

Relationships: In China, the biggest competition has focused on client relationships with large customers, an important part of the business environment.¹ Relationships are usually found using “guanxi” which is a combination of developing personal connections with customers as well as a network of close contacts.² Given the low level of product diversification and similarity in services and prices, banks compete for specific and often the same customers in hopes of developing long-term relationships.