Banking Competition in China Heats Up

As China’s economy grows leaps and bounds by the minute, multinational banks in China are encountering new opportunities and obstacles. While foreign firms generally site the strict regulations and staffing issues as the most difficult part of doing business in China, they are now running up against growing domestic competitors.

In its fifth annual survey of foreign banks in China, PricewaterhouseCoopers ranks the obstacles to doing business in China based on interviews with CEOs, senior executives and branch managers of 42 foreign banks in China. This year’s survey ranked “competition from domestic banks” as the primary concern for businesses in China, surpassing “regulatory environment” which had been #1 the past 2 years.

There are several reasons for the shift of threats and opportunities that foreign banks face in China. Last year, the market share for foreign banks declined simply because foreign firms operating in China, a key customer, were borrowing less. Foreign banks were more reluctant regarding lending policies, taking a cue from their global headquarters who were acting more conservatively. Simultaneously, domestic banks in China were lending aggressively and lowering interest rates. By doing so, they attracted clients from foreign banks both at home and abroad.

More so, Chinese banks are learning. They are gaining expertise in service operations and extensive branch networking so they are getting better at fending off foreign competition. The PWC report asserts that “the limited product range approved for deployment by the foreign banks means that it is increasingly difficult for them to differentiate their products from their domestic counterparts.”

Foreign banks must act strategically if they hope to have room for growth in target Chinese markets. According to the survey, more than 75% of respondents indicated that they would move toward making acquisitions in China over the next three years. Their target areas will focus on asset management, securities, leasing, rural banking, insurance, consumer finance, private equity, factoring and trust companies. Banks may also incorporate local units and branches as part of their long term strategy. Legally, this would allow them to offer a wider range of products and services and differentiate themselves from competitors.

The survey pegs the foreign-bank market share at about 2%, so there is surely room for growth. But with domestic banks expanding their services and expertise, foreigners will need to innovate above the curve, developing faster, more efficient products and services rather than competing on the same playing ground as local competitors.

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