The Concept of International Banking Management - Coursework Example

International Banking Management Name Course Tutor Unit Code Date Abstract The concept of international banking gained momentum in the 1970s. Earlier than that, the majority of banks intensified their operations in their domestic markets, making an allowance for handling overseas dealings. In the midst of the brisk spreading out of global networks, the talk nowadays is of international banks. On account of this, China’s banking system has grown rapidly in intermediation as well as the forms of operation. As of 2001, the Chinese administration has attracted overseas investments into its local banking system. Introduction In the past few decades, the Chinese financial system has grown rapidly. This growth has been propagated in the banking sector, which is the key player in the financial system, and its institutional structure has expanded given the fairly steady macroeconomic atmosphere plus the Chinese domestic high propensity to save. The Chinese banking system at present incorporates a number of the world’s prevalent banks. Under this prism, the intent of this paper is the imprinting of the various aspects of international banking in China. First, the paper describes the concept of international banking with a close attention to china then outlines the reasons as to why China has paved way for international participation in its banking system. This is followed by the process that an entrant foreign bank or branch navigates through so as to gain approval followed by a consideration of the various forms through which foreign banks can tap the wide Chinese customer base. Finally the paper seeks to look at the challenges faced by international banks in penetrating the Chinese market and a conclusion plus a list of references. Concept of International Banking The concept of international banking gained momentum in the 1970s. Earlier than that, the majority of banks intensified their operations in their domestic markets, making an allowance for handling overseas dealings. In the midst of the brisk spreading out of global networks, the talk nowadays is of international banks. Currently, the banking sector engages a central position in the worldwide financial system given the easiness of capital accessibility, the technological means plus the intercontinental set of connections to smooth the progress of these actions. Banks check the businesses by means of estimation, pricing, and credit-granting occupation. From this perspective, the process of international traffic of services, that has as an end result either the formation or running of economic resources, or the transfer of funds from superfluous parts of one country to another, or the arbitration in the framework of state investment financier arrangement. This is the International Banking activity. Studies indicate that the internationalization of banks in China is concerned with two special facets of internationalization. The first aspect regards across the borders banking operations and dealings in foreign exchange. Second, is the side allied to the approach of banks while internationalizing. It has also been concluded that the thrashing of a comparative advantage by Chinese domestic commercial banks as suppliers of credit to bulky borrowers, rivalry from non-bank financial institutions, as well as augmented competition from overseas banks have shaped the momentum for embracing universal banking. Through a broad analysis of applicable literature, it is apparent that the fundamental reason for the success of cross-border banking is the relocation of worldwide flexibility and global resources connecting the different countries. From the foregoing, the proceeds from banking internationalization is the swell of the ‘surplus of the consumer’, that is the variance stuck between the original amount the customer has to shell out for a banking service and the ultimate amount that is finally paid. Furthermore, the global expansion of banker institutions is at all times in relation to their size, international familiarity, adequacy both in human capital and financial capital as well as the character of the home and cross-border work. Finally, on one hand forms or the essential operations, with which a merchant banker institution is developed in a global banking network, are: financial and credit. Conversely, the procedure of international banking is recognized through the services in the banking market of distant country either directly or indirectly. In particular, the straight way for the transfer of capital from the savers to those who are lent funds is employed, for the most part, by the venture banks and the stock exchange companies; whereas the indirect method is utilized by the commercial banks. That is why most international banks in China are big and well established banks like HSBC, Citigroup, JP Morgan Consortium, Bank of America, Goldman Sachs and Allianz. International Banks Penetration into China The Chinese administration assumed a phasing-in move in paving way for overseas investment in the Chinese financial market from the time when it executed a reform and opening up policy in 1978. Paving way for overseas investment in the Chinese banking sector began by the initiation of several technological and administration proficiency to Chinese commercial banks to perk up their competitiveness. The Chinese administration has slowly but surely isolated limitations on the extent of dealing as well as local admission for foreign-funded banks in China in recent years. China’s banking system has grown rapidly in intermediation as well as the forms of operation. As of 2001, the Chinese administration has attracted overseas investments in its local banking system. This has been enabled through the easing of restrictions on foreign owned banks along with the permission to trade in the Chinese local currency, renminbi (RMB), so as to expand the base of products offered. In addition, China has taken on several other banking system modifications including the streamlining its principal banks. Just after becoming a member of the World Trade Organization in the year 2001, China put in operation a schedule of modifications to be effected within five years with the objective of opening up its banking system to overseas rivalry. In 2003, the China Banking Regulatory Commission got instituted to oversee banking sector regulation and management, straightening out the role of monetary policy along with financial system firmness that until then was under the People’s Bank of China. In 2005, Liu Mingkang, the chairman of the commission sanctioned the overseas banks ‘as a central ingredient of’ the Chinese banking system. The commission has been busy reinforcing prudential values as well as supervision over recent years. This has added on to enhancement in supremacy, risk administration customs and lucidity amongst the Chinese banks. A case in point is where presently big commercial banking institutions in China are managed by autonomous boards of directors; there are liberated risk management jobs; and submission of regular financial revelations. On the 11th of December 2006 a landmark for liberalizing China’s banking sector to allow foreign participation achieved. To discharge the WTO obligation, China liberalized the banking market and overseas banks started to benefit from this move devoid of limitations in operating regions, local currency as well as client type if locally instituted. Rules governing foreign-funded banks in China were amended so as to support local integration of overseas banks. China continues to play a crucial role in the worldwide financial authoritarian community through its political presence in the G-20, Financial Services Board as well as Basel Committee. The Chinese administration was determined to fire up execution of the Basel III framework that were to be in operation as of 2013. To date foreign institutions have raked in over seventy-five of their whole sum venture into four of the leading banks in China. The total investments are estimated to be well above $100 million with the majority of the foreign investors having purchased a stake in one or several local participants. The system now includes over 30 foreign banking institutions plus 5 of the world’s largest commercial banks. Moreover, a number of foreign entrants are setting up their own branches as well as agent bureaus in China. Also, foreign banks have been attracted to China given the easiness with which they may be able to compete with local banks on the basis of the products as well as selling strategies given the fact that the market is still undifferentiated, especially retail banking. The reforms offer a fertile ground for foreign investors to have an apparent opening to develop a competitive advantage by means of providing an additionally complex assortment of products as well as services through partnerships with domestic banks or individually. In addition, once China became a member of the World Trade Organization, physical borders restricting renminbi denominated dealing were abolished in four key cities of Shanghai, Tianjin, Dalian and Shenzhen. After that, on December 1, 2002, foreign-funded financial institutions were authorized to initiate renminbi denominated dealing in Wuhan, Qingdao, Nanjing, Zhuhai and Guangzhou. At present foreign banks operate over 387 branches in China judged against over 66 thousand run by the five leading state-run lenders. According to the China Banking Regulatory Commission, they possessed merely 1.6 percent of China’s $13 trillion of deposits and had earned 1.7 percent of its 58 trillion yuan in loans as at the close of last year. However, overseas banks up till now find it tough to set up a market share and spread out their function successfully in China over a decade after China’s entry to the World Trade Organization. China’s domestic banks are achieving competitiveness even as foreign banks still come to grips with the strain of the global financial crisis. HSBC and Citigroup are leading examples of foreign banks mainly struggling in China’s banking market. Overseas banks, cumulatively, characterize just a petite fraction of China’s banking system, at below 2 percent of whole assets, the least split among the leading upcoming markets, as indicated by the International Monetary Fund. On the other hand, state-run banks with the good example of the Industrial and Commercial Bank of China, the biggest globally by market worth, have been changed from more or less bankrupt institutions into money-spinning financial giants with the aid of over $650 billion in government financial support. This is in the face of there being over 35 locally integrated foreign banks and just about 80 foreign banks functioning in local office licenses as at the close of 2011. The banks have been incapable of breaking through the Chinese market further than this small divide for the reason that they have had trouble arising from regulatory restrictions on a number of their activities. Two main restrictions are the based on the right of admission to the Chinese market; acquiring an existing venture via an affiliation with a Chinese bank or establishing a pure presence from the below upwards. The restrictions are intended to allow foreign banks participation, but not take over the market. Also, regardless of the fact that overseas banks are permitted to work with local banks, they are constrained to owning no more than a 20 percent portion in a local bank. Even as local banks may well invite more than one financial banker, the overall foreign investment stake should not go beyond 25 percent. In addition, the Chinese government has set quite high standards for right of entry requiring foreign banks to invest for 5 or more years prior to setting up a branch offering an attractive mix of products and services. Furthermore, foreign banks with in excess of $20 billion are allowed to institute a branch dealing in renminbi and attend to local non-retail customers. The foreign bank must as well hold in excess of $37 billion in working capital, must operate an agency office for over 2 years in China prior to setting up a functioning branch which must have been operated for 3 years and made profits for 2 consecutive years. Forms of International Banks in China Considering that foreign banks are permitted to operate in China in either as alliances or organic bodies, there are various forms through which this is enabled. Joint venture Bank In international joint ventures (between a foreign multinational and a local firm), the multinational typically provides better-quality technology, management expertise, capital, among others, whilst the local firm offers understanding of the local business environment, and access to distribution channels. However, joint venture banks in China as well as foreign banks or branches follow similar restrictions. The Bohai Bank happened to enjoy more freedom as a domestic bank, but this is likely not to happen again in future. At present, the domestic bank’s strength and offering would be key, for instance, HSBC’s investment in Ping An Bank, a joint venture with Ping An Insurers. Another likely approach is the product joint venture, where the foreign bank selects lucrative product divisions. This can be tried between a big-four bank and a joint stock bank to launch a product joint venture whilst getting hold of a wide sales association. This strategy would work well at first, but the commercial banks would be thirsty to go for more products to further make the most of on client contact. Securities Firm A firm trading in financial product (bonds and stocks) would offer a foreign bank on hand client base as well as a sales network plus access to an all-inclusive nationwide permit covering brokerage, proprietary trading, underwriting, or asset management, other than banking. For this reason, securities firms offer an appealing platform for entering segment-based dealings such as wealth management. However, this could be hindered by poor performance of most securities firms owing to imminent stock market reforms. A good example is UBS’s acquisition of a 20 percent stake in Beijing Securities and Goldman Sachs 33 percent joint venture stake in Goa Hua Securities, the highest that foreign companies can hold in a joint venture with securities firms. Fund Manager Through this alliance, a foreign bank can gain a share in China’s growing funds management business while pulling the active distribution channels as well as a reputable client base. Moreover, a foreign bank could set up its individual investment products to add to current products and services. Examples include the ING Investment Bank, Fortis Investment Management, and Deutsche Asset Management. However, this approach is also hampered by imminent stock market reforms in China. State-Owned Banks An association with state-owned banks offers foreign banks a ripe opening to access a country-wide sales network and wide-ranging client base, although they would have diminutive control over domestic management. The state-owned banks have an already established investment. These include the China Construction Bank, the Industrial and Commercial Bank of China plus the Bank of China that by now, have attracted investors. City Commercial Bank By working in partnership with a city commercial bank, a foreign financial banker would benefit from a big opportunity of having control over management and also gain access to a city’s sales system plus client base. However, there is limited geographical scope. Examples of such a partnership include ING’S 19.9 percent stake in the Bank of Beijing, Australia and New Zealand Banking Group 19.9 percent portion in Tianjin City Commercial Bank and BNP Paribas’s 19.2 percent portion in Nanjing City Commercial Bank. Such engagements could be boosted by easing of regulations that permit expansion beyond domicile borders. The Application Progression for Foreign Banks and the Regulatory System To start operations as a fully fledged foreign bank or branch, an entity has to go through a series of steps. The foremost undertaking is presenting a request to China’s banking regulatory bureaus pending an outcome in six months following the request. The next step is the acquiescence of supplementary information in a period of six months after getting the approval from the regulatory bureaus. The bureaus are allowed a time of two months give consent to or throw out a re-submission. If the request is consented to, the claimant is required to register with the correct governmental unit and acquire a trading permit. If an overseas bank or branch intends to tender services denominated in the authorized China’s legal tender (renminbi), it is required that it should have operated in China for a period exceeding three years, and have generated profits two consecutive years ahead of presenting their request. They besides have to fulfill the terms with the asset-liability ratio stipulations laid down in the Decree of China on Commercial Banks. For example, the comparative sum of outstanding loans to that of outstanding of deposits should not go beyond 75 percent. In terms of capital requirements, foreign-funded banks (entirely foreign-funded banks as well as Chinese foreign joint venture banks), should have a bare minimum of $157 million in approved funds along with a bare minimum of $15.7 million in non-callable working capital. Branches operated by overseas banks trading in China ought to be in possession of a bare minimum amount of $31.5 million in working capital. Furthermore, the proprietor of overseas banks are required to be in possession of over $10 billion in property at the close of the year prior to application for approval and foreign banks desiring to set up activities in China are required to have over $20 billion in property at the close of the preceding year ahead of applying for a license. As a landmark progress to honor its World Trade Organization obligation, China set into operation a new regulatory framework to supervise overseas banking institutions in China in January 2002. These guidelines outline the operation of the entity, registration, extent of dealing, requirements, control, closure as well as insolvency of foreign banks. They too require that overseas bank branches operating complete features of foreign exchange dealing in addition to complete characteristics of renminbi dealing to each and every one customers to have working capital of no less than USD$ 72.3 million, of no less than US$48.2 million, which should be in China’s currency (renminbi) and no less than US$24.1 million in liberally exchangeable legal tender. Conclusion Currently, the banking sector engages a central position in the worldwide financial system given the easiness of capital accessibility, the technological means plus the intercontinental set of connections to smooth the progress of these actions. Liberalization of China’s banking sector to overseas investment began by the initiation of an array of technological and administration proficiency to Chinese commercial banks to perk up their competitiveness. The foreign banks operate in China in either as alliances or organic bodies; however, they have to follow a detailed process for approval. Foreign banks in China, up till now, are grappling with a myriad of challenges in competing with local banks especially on regulatory restrictions on a number of activities. However, given the rapid growth of the Chinese economy for the period of the past 20 years and the aptitude to carry on doing so, the country’s position in the universal economy has transformed appreciably. During the Asian financial crisis, the disposition of the Chinese economy globally got enhanced. These changes in domestic plus outdoor conditions would frustrate the Chinese banking system to stay closed and more of international presence is to be expected. 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