China: Foreign Banks: Update November 2012

China: Foreign Banks: Update – November 2012

British Embassy Beijing


Two recently published reports (one by PWC, another by the EU Chamber of Commerce) confirm foreign financial institutions are profitable, but struggling to gain market share in China. The new Chinese leadership is likely to maintain a broadly similar approach to market access for foreign banks.


Foreign banks have a very low (1.93%) and flat market share in China. This is the lowest share of any major emerging market (e.g. 30% in Indonesia, 22% in Brazil, 5% in India), and well short of the UK share (18%) or OECD average (20%).  This low penetration remains unchanged over the past decade.

Why So Low?

In part, this is a matter of choice.  Foreign banks will be wary about lending in China, a country with a very different legal and accounting system.  But in large part, this is because legislation restrains foreign banks. Examples of regulatory obstacles are:

  • The “foreign debt quota” means foreign banks are not allowed to transfer much capital into their Chinese units, and with this small capital base, foreign banks cannot make large loans.  

  • Foreign banks are not allowed to underwrite bonds (HSBC & Citibank are the only exceptions)

  • Banks who operate as branches (instead of subsidiaries) cannot enter retail banking, issue credit cards, or apply to open more than one service-location at a time, and they are forbidden from operating in Renminbi for their first 3 years of operation.

  • Becoming a subsidiary is a regulatory headache: only about 37 of China’s 181 foreign banks have done so, which means most are operating in a restricted field.

Not all legislation is intended to be discriminatory; some is simply written for the way the Chinese banking systems works.  For example, the regulation restricting lending to 75% of a bank’s deposit base makes lending difficult for a foreign bank with no retail network or deposit base,.  Other common complaints relate to the frequently contradictory regulations from China’s five financial regulators – a concern shared by local banks too.

So How Are They Making Money?

2011 was the most profitable year yet for foreign banks in China (combined profits £ 1.7bn), doubling their 2010 earnings and attaining high returns on their investment (30%). . Most foreign banks achieved this by providing services to their multinational clients operating in China.  To the extent that they serve Chinese markets, the foreign banks focus on trade services, foreign exchange, and specialising in innovative and more complex products. 

Attitudes to Foreign Banks

China has some concerns about allowing foreign banks complete market access.

But the reformist view is that China’s banking system has not kept up with the rest of its economic progress, and now represents a drag on her development.  Premier Wen has been critical of the “monopolistic” banking sector (in April), the State Bank Governor Zhou has loosened the government-set interest rates in June, and the Securities Regulator’s Head (Guo ShuQing) has made a number of reforms to develop China’s capital markets.  


We do not expect the leadership transition to dramatically alter the landscape. The reformist view will continue to prevail but through prudent small steps not giant leaps, and mainly through internal reform rather than increased access for foreign banks.  

While it will not be easy, it can still be worthwhile.  This is a large, profitable and growing market.  Compared to rival nations, the UK banks enjoy high market share (23% of the foreign share), and an unusually high level of goodwill from China’s regulators.  This is partly historical , but in part due to the “unrivalled” level of UK-China financial policy co-operation. 


The purpose of the FCO Country Update(s) for Business (”the Report”) prepared by UK Trade & Investment (UKTI) is to provide information and related comment to help recipients form their own judgments about making business decisions as to whether to invest or operate in a particular country. The Report’s contents were believed (at the time that the Report was prepared) to be reliable, but no representations or warranties, express or implied, are made or given by UKTI or its parent Departments (the Foreign and Commonwealth Office (FCO) and the Department for Business, Innovation and Skills (BIS)) as to the accuracy of the Report, its completeness or its suitability for any purpose. In particular, none of the Report’s contents should be construed as advice or solicitation to purchase or sell securities, commodities or any other form of financial instrument. No liability is accepted by UKTI, the FCO or BIS for any loss or damage (whether consequential or otherwise) which may arise out of or in connection with the Report.

Countries: China
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