Recent news has noted that Credit Suisse Group is slowing down its expansion in China, but that doesn’t mean big foreign banks are giving up or giving up on their Chinese dream. Morgan Stanley, Citigroup, UBS, Goldman Sachs and Deutsche Bank are among the foreign banks continuing to ramp up investment in China.
Credit Suisse delays local bank launch until 2024; The launch will allow Credit Suisse to expand its asset management bank. The firm’s management noted a slowdown in China’s economy due to COVID-19-related restrictions and increased regulation. Credit Suisse is also still waiting for on-site verification required by regulators before the firm can expand its operations on the mainland.
In China, it is known that it is difficult for foreign banks to compete successfully due to well-known local and established banks that control a large part of the market share and are used as conduits for the implementation of government policies. For a long time, foreign banks were limited by minimum asset thresholds and ownership requirements, and they remained limited by capital account restrictions. For example, a 2021 ruling limited the ability of global banks to raise money abroad and transfer it to China.
Signs remain that Beijing wants more control over its economy. In 2022, regulators warned foreign banks not to pay their executives too generously. In addition, according to bloombergTensions between China and the US played a major role in the suspension of licenses in the banking sector. This includes licenses requested by Morgan Stanley for mainland expansion.
Foreign banks faced higher funding costs compared to their local counterparts due to problems obtaining low-cost deposits as the main sources of funding. Thus, foreign banks found themselves receiving wholesale funds in the interbank market at interbank rates that are usually higher than deposit rates. Foreign banks also tend to maintain higher loan loss coverage than domestic banks because they have less room to sell non-performing loans.
Despite all this, foreign banks are hopeful that the regulatory wave has reversed. With the introduction of the Shanghai Free Trade Zone at the end of November 2014, the maximum rates on deposits in foreign currency and exchange restrictions in yuan were lifted in this zone, which at that time attracted 23 foreign banks. After this period, in 2020, foreign banks were allowed to apply for full ownership of their partnerships, giving them more incentive to be active in China.
Some banks continue to develop partnerships in an effort to improve access to customers. Goldman Sachs partnered with ICBC in 2021 to improve access to potential investment clients. BlackRock has entered into a joint venture with local Chinese partners and has also expanded its own business. JP Morgan has acquired a 10 percent stake in a subsidiary of China Merchants Bank.
Foreign banks continue to engage in foreign exchange lending and trade finance, as well as investment banking, including derivatives trading and asset management. However, they are at risk due to changes in Chinese law that may impose additional requirements on their core business. New regulations are often introduced quickly and can aggressively restrict activity. Communist Party members unstable, unequal, or otherwise unpleasant.
Foreign banks also have reason to be concerned about government intervention in the economy. squall or regulations implemented in 2020 and 2021 show Beijing’s ability to crack down on what it considers unacceptable behavior, but no less worrisome is the government’s influence on China’s stock markets through government guidance funds in preferred industries. Over the past 10 years, government funds have raised more than $900 billion to provide early funding for companies in their preferred high-tech industries.
These actions highlight the authority of the Chinese government in determining which industries will flourish and how they will be funded. Foreign banks want to grow on the mainland, but the question is whether they will stay in favor of the government, or whether a split between China and the West or China’s own political economic direction will change their fate.