THE CHINA COLUMN: choosing Bank of China over a foreign firm
The Chinese banking industry has come under close scrutiny recently. Agricultural Bank of China's dual listings in Shanghai and Hong Kong marked the world's largest IPO. Days later, China Everbright Bank announced a potential US$2.9bn IPO.
But it is not only retail and institutional investors who are attracted to Chinese institutions: potential candidates, from young graduates to senior managers, increasingly want to join their ranks.
What is pulling them towards local banks? Perhaps surprisingly, it's not really about lingering fears over the financial stability of foreign firms, nor about the traditionally good job security offered by Chinese banks.
The main attraction is more fundamental: domestic banks are improving as businesses and offering better jobs as a result. They have recently gained more exposure in international capital markets and their expertise in domestic banking has been strengthened at the same time.
Adeline Wu, a fresh graduate with a master's degree from one of China's top universities, chose Bank of China over JP Morgan. She explains her decision: "Bank of China has become more internationalised and it has a solid client base and business network in China. It is no longer the Bank of China of five years ago."
Jeremy Cartier, a former fixed-income analyst at Société Générale, adds: "Foreign banks have limited business scope. As the difference in salaries between foreign banks and Chinese ones has narrowed, the lure of foreign banks is fading."
Market share matters
International firms seem to have underestimated the speed at which Chinese banks have caught up and learnt from them, while Chinese institutions appear to have overestimated the ability of foreign banks to expand and penetrate Chinese capital markets. According to the international financial market report released by the People's Bank of China in April, the market share of foreign banks in China fell from 2.16 per cent in late 2008 to 1.7 per cent by the end of 2009.
Foreign banks do not have a competitive edge in long or medium-term loans. They also face problems serving wealthy individuals. While they generally help these clients diversify deposits into financial products, the GFC and the huge losses on various wealth management products that came with it have caused them to lose clients to domestic banks.
Moreover, the cost of developing new clients is high. Foreign banks can't communicate as effectively with Chinese enterprises and government departments as their domestic counterparts can. Although firms such as HSBC, Standard Chartered and Citibank have opened branches in China's main cities and some rural areas, their business network and client base remain fairly weak. Inefficient fund allocation, stricter loan requirements and a relatively small amount of registered capital could all contribute to loss of market share.
Poaching from the globals
Some middle and senior-level executives at foreign banks, who previously felt confined when working within this comparatively restricted business environment, are starting to switch to Chinese banks. Most notably of course, Deutsche Bank's former China chairman, Zhang Hongli, recently moved to ICBC to become vice president.
Other less high profile examples I have heard of include an HSBC senior executive leaving for Bank of Communications, and a former senior VP for Standard Chartered becoming CIO at China Minsheng Bank. As Chinese banks continue to flex their muscles, more bankers could follow.
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