Banking in China: Challenges - Essay Example

BANKING IN CHINA: CHALLENGES Background The opening up of the banking industry in China has been one of the most anticipated developments in the global market. The sheer size of the Chinese market remains to be the greatest attraction to most prospective new entrants. The excitement if reminiscent of China's earlier WTO accession agreement signed in 2001. However, Brian Schwarz (2006) cautions prospective bankers to learn from previous liberalizations in China. He says that the government will likely enforce similar financial regulatory measures particularly for the country's local currency deposits. The local banking industry is already being advised of the increased competition that the liberalization will bring to the industry. Wenli Yuan (2006) believes that that the domestic Chinese banks will have to adjust its strategies to dependence in interest income and improve cash management and treasury systems. Yuan points out that "Newly emerging businesses such as cash management and wealth management show strong growth potential, leverage high technology content, and expand the value-add that banks can bring to commercial and high net worth customers". The Chief Economist of Bank of China International, Cao Yuanzheng, concurs with this opinion and says that to remain competitive, Chinese banks must be able to diversify both their income streams and assets, improve their capital structure, improve technology and enhance its information sharing networks (Xinhua News Agency, 2006). China's Financial Services Market The deregulation of banking in China is expected to the most notable development in China's financial-services market since its WTO accession (Achhorner et al, 2006). Since the implementation of open door policies in China in 1978, it has been able to propel its economy by the sheer mass of its markets. Today, its middle class is estimated at 100 million people, a number that is bigger than most national populations (Craig, 2006). With a strong GDP and increasing exportation, the Chinese market will remain a force to be reckoned with in the future. Though the country is still dealing with poverty issues, the financial health of the country remains strong. Though there have been critics regarding manipulation by the government, a tactic that has been criticizes as well in other fields and industries, China has seemingly been able to balance its interest and foreign entry enough to support its financial status. The financial services industry is being liberalized through the foreign investment in domestic banks and in extending the branches of the market that it can be involved in. (Achhorner et al, 2006). Figure 1 reflects that effects of these developments: there has been significant increase in investors in response to the new policies as well as in anticipation of the liberalization scheduled for December 2006. Chinese Banks Chinese banks play an important business and social role in financial intermediation. The main market of the banks traditionally has been in household savings which is among the highest in the world (Bowers et al, 2006). Today, consumer loans are seen as one of the new developments in the industry one of the key areas of development and growth. Due to a weak capital market, Chinese banks play a more significant role in GDP than banks generally do in other settings. According to Craig (2005), "the banking system provides an estimated 80 percent to 90-plus percent of all business funding total bank loans to government-owned and private businesses represented approximately 160 percent of Chinese GDP, up from 120 percent in 2000". The biggest banks in the country are state-owned: the Industrial & Commercial Bank of China (ICBC), the China Construction Bank (CCB), the Bank of China and the Agricultural Bank of China. There are also currently twelve joint-stock commercial banks (JSCBs). Though the big four banks undeniable are dominating the market, JSCBs have been able to steadily expand their market share. The People's Bank of China, functioning as the central bank of the country, is the one in charge of all monetary policies and has jurisdiction all banks in the country. One of the major contentions of the Chinese banking system with international banking standards is regarding the inconsistency of some of its policies with market-oriented banking. Another factor is the perceived political interference that has contributed to the percentage of bad loans and the approval of government loans that do not comply fully with credit ratings (Yuan, 2006). In addition, Schwarz (2006) points out that though China is allowing more banks to enter the market, the regulations it is putting in place may not allow banks to practice their trade without government interference. Methodology This study will evaluate feasible strategies new entrants to the banking industry in China. Monetary and Fiscal policies before the liberalization of the industry will be compared with the policies that are to mark the liberalization. The information gathered will be catalogued and utilized as indicators of the change in policy. Developments of foreign banks in the respective periods will be gauged according to the indicators to determine if they became a strategic advantage for the new entrants or not (Johansson, 2001) Statistical information regarding the performance of banks in the third quarter of 2006 will be compared to the first quarter of 2007 to determine the transitional changes that have occurred in the course of liberalization. Information will be analyzed statistical for correlation and significance. At the same time, the trends showed will be compared to parallel information with China's premiere rival for foreign direct investments, India. The implication of the conclusions will be compared to studies comparing the financial and banking markets of both countries (McKinsey Global Institute, 2004). A survey regarding the impact of the change in China will be done to assess opinions. The questionnaire will range from expectations of the liberalization and their expectations for the next three months. The survey will also ask what strategies they believe will be most effective for new entrants. After the data gathering, the results of the literature study and statistical analysis will be presented to involve in the field of banking and economics for their critique. This part of the study can either be done through another survey or through interviews. The phase will not utilize questions about the topic but rather the respondents' critique to the information. One of the key strategies that are to be explored for the phase is the feasibility of conducting the survey online to be able to gather more opinions on the results of the preliminary study. The main objective of all the analysis to be done is to be able to establish the significance of the liberalization of the market to the investment in the industry and performance of existing foreign players. Whatever results will be compared to other existing researches to determine if the developments reflect what was anticipated (United Nations Conference on Trade and Development [UNCTAD], 2005). Acquisition of Research and Skills for the Study The necessary literature will be gathered as much as possible from current periodicals and studies. There is also a need to be able to statistically analyze information to be able to make extrapolate conclusions. To be able to accomplish these goals, there will be a need to compile the related literature and limit accordingly to the parameters of the study. It is important to be able to gather enough data for future comparison to survey information. The survey information will be studied using the best statistical method applicable. Among the methods that can be used are correlation studies and levels of significance. Consultations with a statistician will be done before the survey to be able to build questions in line with the objectives of the study and afterwards to analyze the results. Consultation with field experts regarding the preliminary results will also be done for valuation of the results and to asses their opinions. For the purpose of the study, the skills that have to be developed involve the research of literature and analysis, statistical analysis skills, interviewing skill or media skills to support the design manage of the online channels for the critique survey. The academic skills involved in study are to be developed from practicing scientific and academic research. The media skills that have are needed will be done through learning the basics of the related technologies. There is also a need for the guidance of an experienced academic to guide the study and critique its progress. For this purpose, a thesis adviser will be needed as well as a separate adviser for the statistical analysis. The research will also turn to existing institutional studies regarding the topic to guide the research. Also, the research will follow closely online forums that tackle the topic and the issues that are related to it. Outcomes and Value The focus of this study is to be able to understand the needed strategies of new entrants to the banking industry in China really need to be competitive. Without understanding these key elements, it will be difficult for new entrant to survive what is anticipated to be a very competitive and complex market (Tubbs et al, 2006). It is the objective of the study to present the key elements that have to be included in the company's strategic plans for entry that will give them the greatest competitive advantage. Entering this market is already a challenge in itself. However, because a lot of countries also want to enter the market as well, the effect is that competition is set in international setting within the Chinese banking industry (Perner, 2000). Thus, the need to be able to identify the key strategic elements needed is essential in establishing the banks as well as in understanding the market itself. Outcomes At the end of the study, the research aims to be able to enumerate the key elements that very new entrant must have to be able to compete effectively in the liberalized Chinese market. The study will be able to identify key industrial characteristics that drive the market movement. The study will provide insights on the dynamics of the Chinese banking industry and how it is unique to others. Understanding these key characteristics essential because of the significance of culture to the way the country conducts its business. The study does not aim to prescribe the strategy to be taken but rather highlights the points that have to be taken in constant consideration in the formulation of individual companies' strategies. Considering the diversity itself of the new entrant to the industry, it is essential to be able to have a base line reference of strategy not only for one's company but also in anticipation of other new entrants to the industry. Value Since banking in China involves a high degree of cultural identification, there is a need for companies to understand these elements and incorporate in into their own services. This means that companies will be asked to be very flexible may have to distance itself from its traditional way of conducting services. This emphasizes the need not so much for specific strategies but rather the specificity of strategic elements. The manner by which the strategies are carried out may and will likely need to follow closely the development sin the market however the key strategic elements need to be maintained as reference points. Therefore, companies will have to learn well from these experiences to be able to fair better. The value of the study is based on the need to understand the unique opportunity that the liberalization of the Chinese banking industry presents to the world. Previous experience with the Chinese markets and industries have highlighted the need to be able to formulate strategies that consider not only corporate objectives but also the social and political issues that prevail in China more than any other country. The Chinese banking industry is one that will be difficult to defer from because of its sheer potential. However, business must learn that to be able to do business in China, there is a greater need for flexibility. It is likely that new banks will encounter the same scenarios that other industries had to deal with: government regulation, slow market response and intense competition. References Achhorner, Thomas, Chng, Johnson, Michaelis, Holger and Tang, Tjun (2006). Banking on China: Successful Strategies for Future Entrants. Boston, M. A.: Boston Consulting Group. Bowers, Tab, Gibb, Greg and Wong Jeffrey (2003). Nudging Open China's Retail Banks. McKinsey Quarterly No. 4: 9-12. Craig, Valentine V. (2006). China's Opening to the World: What Does It Mean for U.S. Banks [Online]. FDIC Banking Review. Available from [Accessed 14 December 2006] Johansson, Johny K. (2001). Global Marketing: Foreign Entry, Local Marketing and Global Marketing, International edition. Boston: McGraw-Hill Higher Education. McKinsey Global Institute (2004). China and India: The Race to Growth [Online]. McKinsey Quarterly . Available from [Accessed 14 December 2006]. Perner, L. (2000). International Marketing: The Global Marketplace. [Online]. Available from: [Accessed 14 December 2006] Schwarz, Brian (2006). Great Banking Barrier: Proposed Regulations Could Hinder Foreign Expansion Into The Retail Banking Sector. [Online]. Available from [Accessed 14 December 2006]. Skinner, Chris (2006). The Yin & Yang of U.S. Bank Interest in China. [Online]. Available from [Accessed 14 December 2006]. Tubbs, S. L. and Schulz, E. (2006) Exploring a Taxonomy of Global Leadership Competencies and Meta-competencies. The Journal of American Academy of Business, Volume 8, Number 2, March 2006, Dissertation Paper presented at the Eastern Michigan University. Eastern Michigan University: Michigan. Understanding Foreign Direct Investment (2006). [Online]. Available from http://www.going-global.com/articles/understanding_foreign_direct_investment.htm. [Accessed 14 December 2006]. United Nations Conference on Trade and Development (2005) World Investment Report 2005. Wehrfritz, George. 2005. Safe Haven The Slippery Slope; Market Watcher David Webb Says Shady China Deals Threaten Hong Kong's Once Sterling Reputation.[Online]. Newsweek International Pacific Edition. Available from http://integrate.factiva.com/search/article.asp. [Accessed 14 December 2006]. World Bank (2006). PPP GNP 2005. World Development Indicators Database. New York: World Bank World Trade Organization (2006). [Online]. Wikipedia Online Encyclopedia Available from http://en.wikipedia.org/wiki/World_Trade_Organization [Accessed 14 December 2006]. Xinhua News Agency (2006). Competition Sharpens as China Opens Banking Sector. [Online]. Available from . [Accessed 14 December 2006]. Yuan, Wenli (2006). Corporate Banking in China: History, Opportunities and Challenges. [Online]. Beijing: Celent. Available from [Accessed 14 December 2006]. Read More