Chinese banks leverage HK's global exposure (hktdc.com)


	Hong Kong Monetary Authority's Deputy Chief Executive William Ryback explains why Hong Kong gives Chinese mainland banks an important global foothold

Chinese mainland banks are ramping up their business in Hong Kong to gain the necessary exposure to successfully enter other international markets, says David O'Rear, Chief Economist at the Hong Kong General Chamber of Commerce.

He believes valuable Hong Kong experience will stop the banks from making large mistakes. "If they have operations only in China, they face big risks when going international," he says.

Mr O'Rear's comments underscore the reason why Chinese banks are boosting their market share in Hong Kong — to an expected 40 per cent by 2010 from the current 25 per cent, according to William Ryback, Deputy Chief Executive of the Hong Kong Monetary Authority, the city's quasi-central bank and banking supervisor. At the authority's recent annual review, Mr Ryback said that Hong Kong could act as a springboard for Chinese banks expanding into the region and the US.

Strategic moves

Indeed, many of China's leading banks have already elbowed their way into Hong Kong. Perhaps the most well known manoeuvre was the late 2006 purchase by China Construction Bank (CCB), China's fourth-largest lender, of Bank of America (Asia) in Hong Kong for HK$39.7 billion (US$5.1 billion). Through this transaction, CCB practically doubled its business in Hong Kong by acquiring clients, staff, systems, products and outlets that will help it to swiftly develop its retail business in the city.

Earlier, the acquisition of Belgian Bank by the mainland's Industrial and Commercial Bank of China (Asia) was aimed at beefing up the latter's retail banking business, particularly among small and medium-sized enterprises (SMEs). For its part, Bank of China, one of China's four main banks, has a substantial presence in Hong Kong. Bank of China (Hong Kong) was established in October 2001 and is a leading listed commercial banking group in the city. It has about 280 branches and 450 automated teller machines and other distribution channels in Hong Kong, and offers a range of financial products and services to retail and corporate customers.

Still they come

Will the Chinese banks pose stiff competition for other foreign banks? Certainly, other foreign banks see the same opportunities in setting up operations in Hong Kong — leveraging off the growing economic integration between Hong Kong and China. Currently up to 20 applications from foreign banks wanting to set up representative offices are reportedly being processed.

But Mr O'Rear says he is not worried about the domestic market share because all big players in Hong Kong, such as HSBC and Standard Chartered, have plenty of international exposure. As for other foreign banks from, say, Taiwan or India, they are mainly in trade and finance, and wholesaling operations. The competition from China's banks, however, will come primarily in the retail side of the banking business.

Good times ahead

With liquidity so plentiful, it is not surprising that competition has intensified among banks in Hong Kong. Mr Ryback in his review expected greater merger and acquisition (M&A) activity in 2007. Looking at a three-year time frame, Mr O'Rear believes that China's outward investment will double and that "lots of Hong Kong advisers will make a lot of money, which is good for Hong Kong".

But are foreign players going to be the driving force in Hong Kong's banking business? Perhaps not, as Hong Kong banks are ready for M&A activity themselves and indeed are looking to ramp up their business not only in the city itself but also across the border in China, particularly since the Chinese banking industry was opened up to foreign players last year. According to Mr Ryback, about 7 per cent of Hong Kong banks' lending business was related to China and was growing.

Bank of East Asia is a clear example. The Hong Kong-based bank, owned by the Li family, has robust expansion plans on the mainland. The bank's chairman, David Li, told Bloomberg News on February 12 that his institution would add 500 employees in China in 2007 in a bid to boost profits from China by up to 30 per cent in five years, about double the 2006 ratio. Bloomberg reported that Bank of East Asia's loans to China customers soared 77 per cent in 2006, a pace 10 times quicker than at its Hong Kong operations.