The advent of foreign banks in China will mean better service, but at a cost.

The world's largest international bank, Citibank, opened its doors to individual foreign exchange (forex) business for Beijing residents on March 25, and will include transactions of forex savings deposits, remittance and option dealings.

A customer who visited Citibank Beijing Branch to take advantage of the new service, told Beijing Review that he valued the advanced financing facility and high credibility of international banks such as Hong Kong and Shanghai Banking Corp. (HSBC) and Citibank. "The credit cards of these banks are convenient to use overseas," he added.

HSBC's Beijing branch has been in individual forex business for two years. According to the Beijing Banking Regulatory Bureau, a total of 12 foreign banks are authorized to supply multi-currency services in Beijing.

Foreign banks provide the service of advanced financing experts and successful financing products that are far superior to that offered by domestic banks. Their services also cover financing and credit on housing, vehicle purchase and school education at home and abroad.

According to HSBC Premier Center's publicity pamphlets, customers with deposits exceeding US$50,000 can enjoy free HSBC premier financing service. The center provides mainland customers with such services as savings deposit of up to eight different currencies, one-for-one manager service and round-the-clock telephone service. HSBC has 160 premier centers in 30 countries and regions worldwide, and clients may enjoy distinguished service in any center.

Offering convenience

Clients can also conveniently book tickets for sporting events, entertainment productions and golf course facilities. They can even make flight reservations, book accommodation and get emergency assistance in case there is a theft of their personal documents, passports or luggage. According to HSBC, other more convenient services such as telephone loan business are available in other countries.

Individual financing services provided by Chinese banks are still in the embryonic stage, with many remaining on the primary level of selling treasury bonds and funds. They are not financing services in a real sense.

Compared with Chinese banks, foreign banks have much fewer branches as it is impractical for them to open large numbers of outlets during their initial stage of operation in China. However, their Internet service can well remedy this defect, because of its fast speed, low costs and multi-regional service. An insider in banking circles noted that the cost of traditional bank service is 1.07 yuan, telephone service, 0.45 yuan and ATM service, 0.2 yuan, while that of Internet service is only 0.01 yuan.

Unlike Chinese banks' free individual service, foreign banks supply individual service in fixed, but rather high prices. A staff at HSBC Beijing Branch said that his bank would charge no fee to customers whose average account balance exceeds US$2,000 or the equivalent for every six months, otherwise US$20 for account maintaining fee would be charged twice in June and December each year. Citibank has an even higher barrier. Customers with an account balance less than US$5,000 pay an equivalence of US$6, or 50 yuan each month. To be a CitiGold member, one must have an account with monthly comprehensive balance of no less than US$100,000. Both banks stipulate that 0.25 percent fee will be charged for foreign exchange drawn every time, with the minimum of US$5 or 40 yuan.

Services Costly

Data from the National Bureau of Statistics show that China's per-capita GDP in 2003 was US$1,090. Thus, facing the high thresholds, most Chinese citizens cannot afford the service offered by international banks. Many foreign banks declare that their targets are high-end customers.

"We do not mean to gain profit from charging fees for individual financing service. We can select high-end customers since customers with account balances less than US$5,000 are reluctant to open accounts in our bank," said Wang Jiefeng, a senior manager of Citibank China.

"HSBC now does not have a large amount of customers because of the US$50,000 barrier of Premier service. But I believe the number of our customers will grow together with the bank," predicted a staff member of HSBC.

A Shanghai Banking Regulatory Bureau official indicated that foreign banks are mainly targeted at high-end markets in China, with customers covering foreign-funded enterprises, large state-owned enterprises (especially listed ones), Chinese enterprises with huge import and export volumes and Chinese parent enterprises of Sino-foreign joint ventures. Meanwhile, successful private enterprises are their potential customers.

After China's WTO entry in 2001, foreign banks gained more business choices, including financing accounts and Internet banking service. Meanwhile, individual forex business also broke the deposit mode, and more services are available. More free market space will surely bring more return to foreign banks. Sources from HSBC Beijing Branch show the net profit of all HSBC's China-based branches had increased 108 percent to reach 324.7 million yuan (US$39.21 million) by December 31, 2003. Savings deposits increased 136 percent, reaching 23.4 billion yuan (US$2.83 billion). A high official of HSBC China attributed these achievements to China's strong development impetus and the further opening up of the country's banking market. The growth of savings deposits was mainly due to the bank's foreign exchange service for Chinese residents and enterprises.

A survey conducted by McKinsey can well explain China's individual foreign exchange market. According to the survey, there are a total of 30 million high- and medium-income families with an annual income exceeding US$4,300, including 1.2 million, or 4 percent, have more than US$100,000 in savings deposits. Their savings account for more than a half of China's total individual banking savings.

An Asian studies organization under The Asian Banker recently issued its report on China's wealth management, saying approximately 250,000 Chinese urban rich now possess US$18.5 billion of the country's total current foreign assets. Foreign exchange savings deposits of the wealthy in Beijing, Shanghai, Guangzhou and Shenzhen account for 60 percent of the total amount possessed by Chinese residents, making these cities the most attractive markets to overseas private banks and wealth management enterprises.

Foreign Banks Get Ready

Foreign banks are looking forward to the overall opening up of China's banking industry. According to China's WTO commitment, China will open its entire banking industry to foreign banks in 2006. Many foreign banks have begun initiatives in China to vie for future customers. Statistics show that by the end of last year, Shanghai had registered 62 branches and 77 representative offices of foreign banks. The number of foreign banks that can operate foreign exchange business reached 40.

Citibank is the largest foreign bank on China's mainland, with the greatest number of branches there. It has branches in Beijing, Shanghai, Guangzhou, Shenzhen and Tianjin, with Chinese headquarters in Pudong Area, Shanghai. Citibank Shanghai Branch, which began to offer foreign exchange business to local residents in March 2003, now has 20,000 customers, with 90 percent of them residing in China. Citibank indicated recently that China is its strategic focus and predicted that China's individual banking business would grow steadily in the coming years.

Wang Jiefeng revealed that Citibank's individual banking business worldwide reached $9 billion in 2003. However, the operation in China is currently running at a loss, mainly resulting from fixed asset input, such as fitting out the interior of local branches.

"China has a large market prospect. It is the best time to enter the Beijing market, and the input will surely bring abundant returns," Wang concluded.

(Beijing Review May 4, 2004)