Financial Services Cover Story: Australian Banks in China
Australian banks are drawing on their well-regarded reputation to make significant progress in China’s restrictive financial services sector, reports Sophie Loras.
National Australia Bank may be the last kid on the block of the top four Australian banks to aggressively promote its presence in China, but its brand new office in the heart of Shanghai’s Lujiazui financial district, says a lot about the bank’s future China ambitions and direction.
The boardroom alone boasts one of Shanghai’s most spectacular scenes with the awe-inspiring sight of the delicate tiers of Shanghai’s famous Jinmao Tower and the imposing World Financial Centre beside it. From another corner, is a sweeping view of the Bund with all its colonial-era custom and banking houses and the 24-hour hustle and bustle of China’s endless commerce floating up the Huangpu on the back of barges and giant container ships. If the executives at NAB needed any more reason to justify their China investment, they need only look out the window.
Heading up NAB’s China venture is Danny Armstrong, recently recruited from the Commonwealth Bank after spending five years’ setting up its Vietnam operations.
“It’s not every day you get to start a bank in Asia,” say Mr Armstrong. “It’s a lot of fun and it teaches you a lot of things.”
NAB has had a representative office in Beijing since mid-1982, and holds a 20 percent stake in Union Trust and Investment.
The other Big Four banks have an even stronger presence in China.
ANZ – which leads the fort in China – is the first to have received local incorporation in addition to four branches in Shanghai, Beijing, Guangzhou and Chongqing, two sub-branches and a rural bank in Liangping. It holds 20 percent stakes in two Chinese banks.
Westpac – which recently opened its second Mainland China branch in Beijing to compliment its existing branch in Shanghai – has an MoU with Eximbank of China.
The Commonwealth Bank, which has a branch in Shanghai and a representative office in Beijing, holds stakes in two Chinese banks and joint ventures with a life insurance company and an asset management business.
Macquarie Bank also has a presence in China with representative offices in Shanghai and Beijing.
In June, NAB received the green light from China’s Banking Regulatory Commission for its branch status in Shanghai. This will allow NAB to support existing institutional, corporate and business banking customers operating and trading with China.
The bank is hoping to draw off its existing relationships in Australia and New Zealand in the key sectors of resources and agriculture as China continues to shore up its food security and energy needs.
“In the agri-business space, NAB is the biggest agri-business bank in Australia,” says Mr Armstrong. “We think there are some transportable skills for our customers that can be utilised well in this market.”
Australian banks operating in China are also hoping to capitalise on trade and investment flows back into Australia as large Chinese corporate and state owned entities look to integrating into other parts of their supply chain, by investing in Australia.
“We think the ever increasing trade flows between Australia and China provide terrific opportunities in our industry and also for our Australian and New Zealand customers who are looking to increasingly gain exposure to the biggest growth economy in the world,” says Mr Armstrong.
Long-term, NAB, like all other foreign banks operating in China, is awaiting its local currency licence – a process that takes at least three years from receiving regulatory approval for branch status.
“The perceived Holy Grail for banks coming into China at the moment, is the opportunity to do local currency business in due course. So obviously in the medium term we’d be hoping to secure a Renminbi licence,” says Mr Armstrong.
Westpac has come one step closer to securing its Renminbi licence after celebrating the Shanghai Branch’s third anniversary, in conjunction this year, with the opening in July of Westpac’s new Beijing branch in the towering World Financial Centre.
The bank has now applied for a local currency license for Shanghai which will allow it to offer customers onshore Renminbi products and services by the end of the year. It is also moving towards developing its CNH offering in Hong Kong.
“We’ve grown the business over the last three years to be in a position where we are servicing our Aussie-Kiwi customers doing business in China, but more importantly we are now able to develop a client base of Chinese SOEs and POEs who are transacting back into our home markets either because they are investing or have a trading relationship,” says Westpac’s China Country Head, Andrew Whitford.
Westpac’s services cover investment flows – to support Chinese companies looking to invest into the bank’s home markets in Australia, New Zealand and the near Pacific; trade flows to ensure the bank is operating at both ends of the supply chain; and people flows.
“A lot of our customers are transacting with China and we want to be able to support our customers’ customers. And we are doing that through our trade platform in Shanghai,” says Mr Whitford.
The bank has taken the unusual step of making Shanghai its Greater China headquarters – the first Australian bank to choose Shanghai over Hong Kong.
“There’s no argument that Shanghai has aspirations to be a global financial centre. Both Shanghai and Hong Kong are both very important markets. They service different types of products and different types of clients,” says Mr Whitford.
“But we see real long-term growth is in the Mainland,” he says.
Westpac also hopes to be able to better position itself to service its customers with the onshore and offshore Renminbi market as China moves towards the internationalization of the Renminbi.
“The internationalization of the Renminbi is a very important change that’s going to be occurring in greater China and we recognize we need to be properly positioned to seize that opportunity,” says Mr Whitford.
In the three years since establishing its Shanghai branch, Westpac’s China growth has, in the words of Mr Whitford, “moved much faster than expected.”
The bank now employs a dedicated relationship management team and a dedicated sales team. And its China operations are now fully staffed by local Chinese employees, with Mr Whitford, the bank’s sole Australian representative in Mainland China.
Long-term, the bank hopes to open a further two branches in Mainland China to compliment its existing branches in Shanghai, Beijing and Hong Kong.
The bank this year also signed an MoU with the Export-Import Bank of China.
Under the deal, Westpac will support China Eximbank’s customers going to the Australian market and the China Eximbank will support Westpac customers coming into China. ANZ has signed a similar deal.
ANZ has been the longest serving Australian bank on the ground in China, setting up a representative office in Beijing in 1986 followed by the Shanghai branch in 1993.
“I think it is fair to say that among the major Australian banks, we have a long history in China supporting Australian companies and Chinese companies with cross border trade,” says ANZ China CEO, Dr Charles Li.
But it has been in the last four to five years, that the bank has really begun to leave its mark in China – the most significant event, being local incorporation in October 2010 – making it the first Australian bank to do so.
It has branches in Beijing, Shanghai, Guangzhou, Chongqing and sub-branches in Beijing and Shanghai.
The bank also holds a 20 percent stake in the Shanghai Rural Commercial Bank and 20 percent stake in the Bank of Tianjin.
The bank is also focused on leveraging off the strong student and migration flow from China to Australia.
“By being the leading Australian bank in that area (of holding full licenses) allows us to do more. It enables us to do quite a bit more,” says Dr Li.
It’s all part of ANZ’s Super Regional Strategy – of which China plays a central role.
The bank has a strong presence in Taiwan, Laos, Cambodia and Indonesia. And Dr Li believes intra-regional trade makes ANZ very well positioned to serve Chinese companies moving across the border to do business in those countries and those businesses from those countries coming into China.
“It’s probably fair to say China plays a significant role in the overall part of the ANZ super regional strategy,” Dr Li says.
Dr Li also stresses the importance of good people. He says that staff moving across to ANZ from other leadingbanks in Asia, such as Standard Chartered and HSBC, reflects the good standing Australian banks have in the region post GFC.
“Australian banks are very strong in capital and very prudent, making them a lot more attractive place to work for many people,” he says.
Doing business in China isn’t easy. And Dr Li stresses the need for patience when doing business in China.
“Doing business in this market does require quite a bit of patience and participancy and you really have to manage yourself with a medium-term view.”
Internationalisation of the RMB
The internationalisation of the Renminbi remains one of the most significant events globally and regionally.
Dr Li says the speed of the development of the internationalisation of the Renminbi has been very fast – with cross border trade settlement and the growth of Renminbi deposits in Hong Kong and other markets.
He says the acceptance and availability of the Renminbi in trade settlement is also spreading very fast.
“In my personal view in the offshore markets, the Renminbi has every potential to become market equivalent to the Euro dollar. I think there are many aspects where the offshore Renminbi development resembles the early days of development of the Euro Dollar. So I’m fairly positive the offshore Renminbi market will continue to grow as the Renminbi becomes more widely accepted as a trade settlement currency and once the offshore Renminbi accumulation continues to build up, the sophistication of the markets will develop,” Dr Li says.
In Hong Kong, ANZ is authorized to deal in offshore business, meaning it can service customers in Hong Kong in the CNH (the Hong Kong Renminbi) market or across the border in the CNY (Chinese Renminbi) market.
“We definitely want to be the leading Renminbi bank in Australia,” says Dr Li.
The challenges for foreign banks in China
Austrade has assisted individual financial services firms with introductions to potential business partners, referrals to professional service providers and general analysis of the potential opportunities for them throughout China. It works closely with the two chambers in Shanghai and Beijing and conducts events aimed at profiling and promoting Australian financial services capabilities to Chinese financial sector counterparts.
“The Chinese market remains a challenging one for the Australian financial sector due to stringent regulatory limitations in many areas and a cultural and business environment considerably different from Australia,” says Brent Stewart, Austrade Trade Commissioner in Shanghai.
“However, the strong engagement of many Australian industry players, including all the major banks in the market, indicates that the Australian sector sees opportunities and growing potential for their business in China,” he says.
Most recently, Austrade worked with the Minister of Trade, Dr Craig Emerson, to host Mission 2.0 Trade Minister. During the mission, Dr Emerson launched an Austrade Australian banking report in Shanghai.
Dr Emerson told the group that financial services trade would continue to facilitate the strengthening of the commercial bonds between Australia and China.
“China’s top five banks have opened offices or branches in Australia. And likewise, Australia’s four pillar banks have all established a presence in China, along with the Macquarie Group,” Dr Emerson said.
“As China focuses more on domestic consumption, we see opportunities for investment and closer collaboration, especially in areas where Australian financial expertise can contribute to the development of China’s financial industry and wealth management,” he said.
Australia’s reputation in China, speaks for itself. Australian major banks make up four of the world’s nine AA rated banks or higher.
“Australian banks as an industry are very proud of the fact that they have maintained their ratings and stable outlook right through the global financial crisis,” says Danny Armstrong.
“And we’d like to think that’s a function of good regulation, but also it is good management,” he says.
AustCham Joint Financial Services Issues Paper
In May, in an AustCham first, the Australian chambers of commerce in Beijing and Shanghai jointly launched the Australian Financial Service Business in China 2011 Issues Paper. The financial services working group, headed by Mallesons Stephen Jacque’s China head, David Olsson in Beijing and Andrew Whitford in Shanghai, hope the paper will raise awareness of strategic and emerging issues for Australian financial services firms operating in the China market. It also hopes to leverage off the strength and reputation of Australia’s financial system to facilitate a dialogue with key officials and policy makers in China.
Key areas highlighted in the report include:
– The need for greater communication between Australian financial institutions and regulators and policy makers in China.
– Stronger policies to encourage more foreign market participation in China’s local banking industry such as increasing the number and scope of investments permitted by Australian banks (currently there is a 20 percent equity cap on foreign banks) and speeding up approval processes for local incorporation and obtaining Renminbi retail business licenses. (The current waiting period is three years of operation and two years of profitability).
– Internationalisation of the Renminbi – with the recommendation that the People’s Bank of China and the Reserve Bank of Australia establish a reciprocal currency agreement.
– Better coordination between Chinese regulators.
“[The paper] allows Australian financial services to make its mark in China, and it’s really a great thing, because at the moment the Australian financial services sector is very well regarded by the Chinese,” says Andrew Whitford of the joint paper.
Despite the regulatory challenges in China, a recent report commissioned by PwC found a high level of confidence by foreign banks trying to get a foothold in the Chinese market.
While the 127 foreign players operating in China only commanded 1.83 percent of the Chinese banking market in 2010, (a slight increase from 1.7 percent the year before), the report found that foreign banks continued to believe that China offered rich opportunities.
“What is clear is the resolute commitment by the parents of the foreign banks to the China market,” the Foreign Banks in China report said
On a scale of one to ten, commitment remained at eight or greater. Locally incorporated foreign
banks scored 8.8 out of ten, while the Asian banks rated 9.1 out of ten. By 2014, 25 participants believed their parents’ commitment levels would be nine or greater.
However, banks interviewed for the report also believed they would only be able to exploit these opportunities if the playing field was level, and the regulators across the sector facilitated the growing internationalisation of the Chinese economy.
Former Australian Ambassador to China, Dr Geoff Raby believes that currency flows will be a big area for Australia in the future.
“I certainly think financial flows are going to be extremely important and there is going to be a big opportunity for us to be at the forefront of currency swap,” Dr Raby says.
“If we get the currency part of the relationship right – that is going to make for a very big development in the relationship,” he says.
There remains, despite the challenges, a strong level of optimism for foreign banks in China.
“Given the increasing engagement of the Australian sector in China, I am quite optimistic about the future,” says Mr Stewart.
“At both a government and commercial level, Australia needs to continue to advocate and support the long-term liberalising trend of the sector.”
Australian Financial Services Sector: Facts and Figures
· Australia was ranked by the IMD World Competitiveness Yearbook as the most resilient economy in the Asia Pacific in 2010 and the second globally.
· Four of Australia’s banks have “AA” ratings or above.
· The Australian stock market is the 7th largest in the world and Australia has one of the largest pools of funds under management globally (A$1.7 trillion).
· In the Asia-Pacific, Australia ranks as the largest securitisation market, the second largest debt securities market, the fourth largest insurance market, the largest merger and acquisition market, and the largest hedge funds market.