Foreign Banks Consider Chinese Peers as Biggest Challenge

In China, the foreign banks have to deal with the fierce competition from the Chinese domestic banks, which are their biggest challenge in China.

Competition is inevitable, but the competition in China’s banking industry is getting heated.

Previously, the foreign banks thought that the biggest difficulties for their development in China are the regulation environment and human resources. But a new problem has arisen and become the biggest hurdle for foreign banks’ development in China – the competition from the Chinese banks.

PricewaterhouseCoopers conducted a survey targeting 42 chief executives and branch managers of foreign banks in China. Then it listed the biggest challenge for foreign banks’ operation in China.

The latest survey showed that the competition from the Chinese banks is ranked No.1, which is for the first time. In the past two years, the biggest challenge is the “regulation environment”.

The foreign banks’ executives didn’t change their opinions at one night. The competition from Chinese banks was considered as the second largest challenge last year despite the difference in reasons.

In 2009, the foreign banks’ key customers – the foreign-funded companies in China sharply reduced the loans they borrowed, resulting in the deceased market share of foreign banks. In addition, the financial crisis forced the headquarters of these foreign banks to be more conservative in development strategies. Meanwhile, their China-based branches’ credit policies were not attractive enough to earn new customers. This enabled the Chinese banks, which can lend loans with low interest rate, to have great advantages to attract the customers of the overseas banks.

However, things became different in 2010. With eased growth rate of domestic banks in credit loans, the foreign banks have accumulated certain confidence in the Chinese market. The situation should be similar the one in 2007, in which worries about Chinese banks’ competition were only ranked No.9 in the survey of PricewaterhouseCoopers.

But things didn’t go as expected by the foreign banks. The reason is that the Chinese banks are making improvements.

According to the survey, the Chinese domestic banks, which are featured with their widely distributed offices, continue to improve their products quality. The bettering services mean the improving ability of the Chinese banks to deal with the competition from the foreign banks. The Chinese banking regulator set up limitations over the product range of the foreign banks, which weaken their ability to provide competitive products.

Thus, where does the future of the foreign banks lie? The survey gave out some clues.

Three fourths of the respondents said that they will make some acquisitions in China in the next few years. The prospective targets are the banks and companies specialized in assets management, securities, leasing, rural banks, consumption finance, private funding and so on. In comparison, only 50% of the respondents had the plan of acquisition in 2008 and 2009.

Another change which may happen is that more and more foreign banks will make their China branches registered in China. The change of identity will allow the foreign banks a bigger range of products and this is the key for the banks’ differentiation strategy.

Right now there are only 30 foreign banks having their China branches registered in China. The survey told us that another 10 to 15 foreign branches will do the same thing before 2013.

The survey showed that the market share of foreign banks in China is only 2% and there is a large space for their further development. Various clues proved that the foreign banks are studying into different banking businesses. The foreign banks may have to take an innovative way to get a firm foothold in China.