China is the fastest growing of the group of countries commonly known as BRIC (Brazil, Russia, India, China), having experienced estimated GDP growth of 10.2% in 2010. It represents the second largest global economy in terms of GDP and is expected to add another $1 trillion of GDP in 2011. Retail companies from the western world have already made inroads in this market. Volkswagen and other companies from the U.S. and Europe are developing market-specific brands to address the preferences of Chinese consumers. Should American banks follow suit?
China’s banking sector remains very tightly controlled by the government and lacks a robust supervisory infrastructure. Nevertheless, this has not discouraged many U.S. banks from beginning to build a presence on the other side of the Pacific Ocean.
In 2010, institutions such as Northern Trust, State Street, and BONY Mellon sought to establish themselves in China. These institutions and other larger banks seek to take advantage of strong growth in China’s commercial sectors – and the need for assistance with M&A transactions, global investments, and global transactions that has come with it.
The commercial, wholesale, and investment banking opportunities associated with operating in China are well documented. There may be retail banking opportunities, as well. Many consumers, especially in the China’s more rural interior, remain unbanked. Chinese consumers also have high savings rates, typically saving as much of a third of their income. Many financial products that are well known to U.S. markets are not widely available in China.
Financial products such as pensions, insurance, credit cards, and mortgages will need to be more fully developed if China is to move towards a more market-driven economy.
The ability of U.S. banks to both participate in this development and take advantage of this opportunity may be hampered in the near-term by restrictions on foreign bank participation in the Chinese financial services sector. Foreign banks are limited to purchasing stakes of no greater than 20% in local lenders. While foreign banks can form partnerships with more than one of the over 100 smaller city commercial banks in China – and while a partnership of this type may be adequate for a smaller U.S. bank looking to gain entry into the market – this represents an inefficient way to build scale in the country.