Innovation Highlights Foreign Banks

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In today’s market environment, the foreign banks face many challenges along with a lot of opportunities in China. In order to get accustomed to this market, they should improve their own competitive power through its own financial innovation.

From the end of 2010, the high-rising inflation stress forced the Chinese government to take tight monetary policies, which both restrained issuance of loans and abated the fluidity. These measures are taken to prevent the hard landing of the economy. The Chinese government also cut the goals of loan increment by drastically increasing the requirement for reserve requirement and interest rate. Meanwhile, some regulatory measures are taken to cool the real estate market.

These are different from the intensive financial stimulus package taken at the beginning of 2008 and the beginning of 2009. Therefore, it is expected that the increase of loans in 2011 would be between 14% and 17%, much lower than the 19.6% growth in 2010 and 17% in 2009. This change would affect the business operation of foreign banks. For example, the 75% loan-deposit ratio is a new source of stress for multiple foreign banks because most of them do not have so many business halls as the domestic banks.

How to maintain fast development and stand out in the competition with other banks is a common problem that all foreign banks in China have to face.

Most of the foreign banks in China cannot compete with domestic banks in the number of business halls because of their short history in this market. In addition, most of the foreign banks target the segment market and thus have limited client base. These disadvantages mean a lot of challenges and require the foreign banks to find their own advantages in competition before taking measures to boost business and complement the traditional loan-based fundamental business.

The furious competition featuring intensive launching of new products entails the transformation. “Our prominent advantages lie in the ability of financial innovation, international experiences and foreign network,” said Zhang Yongguang, president of Societe Generale (China) Co., Ltd.“As a foreign bank having been engaged in China for 30 years, we see Chinese companies have the need for more and better services.”

“In my opinion, it is the right time for the financial innovation, because China is celebrating the 10th anniversary of its joining into the WTO. The financial market is gradually matured; the progressive urbanization, the improvement of financial market facilities and the increase of the household disposable income all heighten people’s anticipations for the demand of new financial products, such as securities, stocks and financing products,” Zhang Yongguang said.

From the viewpoint of the regulatory departments, the financial innovation could be good for the whole industry. For example, the new industrial situation, new tools and new market situations all emerge as the times require. The pricing system and resource allocation are more effective. The investors are given more choices and the risks become more decentralized and controllable. Presently, the China Banking Regulatory Commission is making some inspiring decisions. Zhang Yongguang thought it was good for the long-term business increase, fair competition and thriving of Societe Generale.

According to Zhang Yongguang, Societe Generale has noticed that some banks with great demand for capital have already developed some new financing products to recruit the deposits of high-end clients against the situation of constrictive fluidity. “If the regulation could be less strict, we forecast that we can launch more financing products to meet the diversified demands of clients.”

The system of the qualified domestic institutional investor (QDII) in China could serve as another example for the necessity of financial innovation. The Industrial Bank has already got ready to launch a series of QDII products, allowing domestic investors in China to invest into overseas securities and bulk commodities through QDII. In addition, the application scope of strict capital regulation policies can perfectly control the potential risks. The QDII system can provide good stages for the foreign banks, allowing them to make use of their specialties in the international financial market.

The internationalization of RMB brings new opportunities for the foreign banks. Supported by the international network, foreign banks could provide new services of cross-border RMB settlement as well as the opportunities of overseas RMB investment for the domestic investors. The foreign banks could also make full use of its internationalized network to help Chinese companies to “go out” to expand business in overseas markets. For example, Societe Generale has very big network in Africa, East Europe and Russia and can provide financial support for many Chinese enterprises.

Zhang Yongguang said: “The foreign banks could also make use of their professional under- standings of the international financial market, as well as the experiences in risk control and financial product innovation, to provide high-end services. In this process, the free market can bring abundant choices for Chinese enterprises and individuals, who can gradually enjoy the professional experiences and service abilities of foreign banks. This could be a momentum for the longterm development of the banking industry in China. The international experiences show that the financial innovation is a double-edge sword. I very much agree with the gradual opening of market by China, which could bring the advantages of financial innovation to its full extent while avoiding unnecessary unrest. This needs very powerful regulatory and control structure, monetary polices and flexible measures.

“Though China is still in the initial phase of financial innovation and reform, I think the regulatory department has already sensed that the lack of prudence in innovation could bring unexpected risks for some financial institutions, which could further endanger the safety of whole financial system. We notice that the scope setup of financial innovation is also the field the regulatory department cares. The new products can be launched if they are within the scope. The prudence gives out an obvious signal for all the practitioners in the market, telling them that banks need very good corporate governance structure, effective risk control measures and well-placed consumption measures if they want returns from their financial innovation.”

“Societe Generale is a 147-year bank and has business in 85 countries. As a foreign bank, we need to accelerate the development of our core business in China and make use of this maturing market, as well as various opportunities brought by the opening of China’s financial market. Meanwhile, we need to understand the prudential policies of the government and show our preparation in the risk control, client support, client protection and service quality to the regulatory department,”Zhang Yongguang said.