(Yicai Global) July 5 -- Foreign banks will usher in a new golden decade after ten years of exploring the market, Zhu Tong, president of Deutsche Bank China told Yicai Global in an exclusive interview.
After joining Deutsche Bank in 2003, Zhu has successively served as chief operating officer, general manager and vice-chairman of the German lender. She has overseen the company’s development strategy and its implementation over the last 15 years.
Evaluating Foreign Banks in China
It has been 11 years since foreign banks entered China, and there have been mixed judgments among the public on their development. The proportion of assets of foreign banks as part of total assets of financial institutions in the banking industry has continuously fallen reaching 1.3 percent at the end of last year from 2.4 percent in 2007. The growth rate of foreign banks’ total assets was much slower than Chinese counterparts, which own more than CNY250 trillion (USD37.9 trillion). This far outstrips the CNY3.2 trillion held by foreign banks at the end of 2017.
“It is not fair to say that foreign banks did not develop well as their asset proportion of total assets is slightly falling,” said Zhu. “Objectively, we are witnessing an overall healthy development.”
In her opinion, it is not objective to judge achievements using this measure because there are various differences in business and profit-making models between foreign and Chinese banks. Foreign banks enjoy the advantages of product innovation and the best foreign solutions for customers, particularly risk management and cross-border services.
Deutsche Bank China posed net capital of CNY8.9 billion at the end of 2017, double the amount recorded in November 2009 when the lender secured a capital increase from CNY1.6 billion to CNY4.4 billion.
“Our self-owned retained profits drove capital increasing. In the past decade, we also continuously invested funds to maintain the growth of our core businesses in China,” Zhu said when evaluating the bank’s performance in the country. “The growth rate exhibits a good performance compared with any investment and corporate development,” said Zhu when evaluating Deutsche Bank China’s performance in last decade.
Another criticism is that the capital adequacy and non-performing loan ratios among foreign corporate banks have been far higher than China’s regulatory requirements, but their returns on assets and on equity are relatively low. On the bright side, foreign banks are safe despite poor profitability and low capital utilization.
Zhu explained that foreign banks mainly develop their cross-border business and provide clients with a variety of “light-weight” products and solutions so the size of their assets and corresponding risk-weighted total assets are naturally small. At the same time, the relatively high capital is to comply with regulatory safety requirements (such as loan concentration limits for single customers and single groups) and to meet clients’ funding needs.
Overall, Zhu believes that most foreign banks, including Deutsche Bank, have made satisfactory progress in the past decade of China’s financial opening up. By the end of last year, there were 209 foreign-funded banking institutions operating in China, with total assets of CNY3.2 trillion, up 10.7 percent from the same period a year earlier. They achieved a net profit of CNY14.6 billion over the year, an annual increase of 14.6 percent.
Reopening Marks New Starting Point
A new turning point began in March last year when the former China Banking Regulatory Commission issued a new circular explaining the various business activities carried out by wholly foreign-owned banks, joint venture banks, and foreign banks branches.
“This document constituted a door opening to foreign corporate banks,” said Zhu. A wholly foreign-owned bank or a foreign joint venture bank may now underwrite treasury bonds and invest in domestic banking and financial institutions. Including foreign banks branches, these three types of institutions can also legally conduct trusteeship business, financial advisory services and other consulting services.
More importantly, wholly foreign-owned banks, foreign joint venture banks, and branches will be to conduct coordinated cross-border business jointly with their parent banks in accordance with the law, giving a playing to their advantages in global services. By doing so, they can offer clients comprehensive financial services for activities like overseas bond issue, listing, merger and acquisition, as well as financing.
The comprehensive cross-border business competence represents the real area of superiority for foreign banks, Zhu said. The release of the notice embodies the fact that regulators have been fully aware of the essential advantages of foreign banks in China, and of how to give weight to these advantages. This encourages foreign banks to support Chinese enterprises’ global development by leveraging the cross-border advantages of their parent banks and offering comprehensive services in the country.
These measures make the future China development strategies for Deutsche Bank clearer. Deutsche Bank first set up shop in Shanghai as early as 1872, aiming to support the Chinese businesses of global clients initially. Even now, these transnational enterprises still act as the lender’s most important clients in China. With China’s further opening up, Chinese enterprises also need to go global. Foreign banks can serve Chinese clients through their local branches.
China’s openness has gone far beyond expectations, which is a wise and far-sighted decision indeed, Zhu says. “It indicates that Chinese government is confident in managing the financial market properly, while it also expects foreign banks to play a positive role in deepening reform and openness of China’s capital market. Undoubtedly, the next decade will be a new golden period for foreign banks’ Chinese business.”
Zhu is also optimistic about the future. “Taking major German manufacturing enterprises as an example, after China’s accession to WTO, traditional manufacturing industries accelerated the pace of their opening up,” she said. After more than a decade of efforts, the Chinese market now contributes around 30 percent to their total turnovers and profits.”
“Today, China’s financial and capital markets have been fully opened up and in the next ten years, I am confident that the contribution made by our Chinese market to global turnovers will also significantly increase,” Zhu added.
Editor: William Clegg