International players with eyes on the Chinese banking market are buying into the country's top-tier commercial lenders in an effort to increase market share before the sector is fully opened in 2007.

Opportunities in China's lucrative banking industry, once a mirage for foreign banks because their business in the country was strictly limited, are becoming attractive as Chinese banks try to build overseas alliances.

HSBC Holdings Plc plans to offer as much as US$1 billion for a 20-percent stake in China's Bank of Communications, China's fifth-largest lender, according to the Financial Times.

At the same time, Standard Chartered Plc has abandoned its plan to become a shareholder of the Bank of Communications. Some experts argue that Standard Chartered was not satisfied with the prospect of merely being a minority shareholder.

Standard Chartered makes around two-thirds of its profits in Asia.

The London-based bank wants to incorporate its staff into the management of banks it acquires, rather than just putting in money as a financial investor. "We do not want to be a passive shareholder. We want to be an active shareholder," said a senior executive.

However, Standard Chartered continues to look for partners among China's second-tier banks. The bank is aiming to finalize the purchase of up to 20 percent of a Chinese bank by year's end, according to Crystal Qian, Standard Chartered (China) spokesperson.

"We are in talks with a bank in China to buy a stake," Lance Browne, chairman of Standard Chartered (China), said in an interview.

"I hope we will reach an agreement this year."

Qian told China Business Weekly that it is premature to reveal the negotiating bank. The market speculation is that China Everbright Bank is the potential partner.

Placement of new branches is another major issue for foreign banks.

According the rules set by the banking watchdog, foreign banks can only establish one branch each year, said Li Feng, a senior official with HSBC's Shanghai branch.

As a result, foreign banks are paying special attention to branch placement.

"The first issue we should handle is seeking suitable places to set up branches," said Dicky Yip, president of HSBC (China).

It is reported that Citibank has a team dedicated to finding the best location for new branches with another team handling government approval.

"Whether Citibank or HSBC, they all want to set up as many intra city branches as possible before 2007 in high-end business places, to cater the needs of high-end clients," said an industry expert.

On May 18, HSBC announced it would open a branch in Suzhou, the bank's 10th branch on the Chinese mainland.

On May 31, HSBC set up its second branch on Shanghai's Huaihai Road, a commercial centre, making it the foreign bank with the largest number of branches in China.

Three days later, Citibank set up a branch nearby. Standard Chartered is planning to open a branch in Nanjing, capital of Jiangsu Province, according to an industry executive, who declined to be identified.

Singapore's three banks - DBS Group, Overseas-Chinese Banking Corporation (UCBC) and United Overseas Bank (UOB) - are eager to join the jostling among foreign heavyweights like Citibank, HSBC and ABN AMRO as they position themselves ahead of the 2007 deadline.

UOB and UCBC each have five branches, which are mainly clustered in the richer coastal areas in southern China and in Jiangsu Province.

DBS, with three branches, is playing catch-up. It plans to open a branch in Guangzhou in the second half of this year, according to Richard Leung, DBS Bank's newly-appointed China head.

ABN AMRO, the Netherlands-based bank, has three full branches in Shanghai, Shenzhen and Beijing. The bank also has three representative offices in Tianjin, Guangzhou and Wuhan.

ABN AMRO is eager to open new outlets to promote its private banking business, Grace Ding, spokesperson for ABN AMRO (China), told China Business Weekly.

In the spring of 2003, ABN AMRO has opened its first "Van Gogh Preferred Banking Centre" at Shanghai to provide a comprehensive range of personalized wealth management services for the customers.

Overseas players, including the world's biggest lenders, will be allowed to operate freely on the mainland from the end of next year under the World Trade Organization guidelines.

China is encouraging foreign banks to take stakes in domestic lenders to prepare Chinese banks for the full opening of the market in 2007.

After this deadline, restrictions on foreign competition will be lifted.

Before the domestic market opens up, second-tier banks will need to prepare to face fierce new competition.

Alliances with foreign partners can provide banking management expertise and advanced strategy, said Dong Shenxin, research director of Dongtai Securities, a Hong Kong-based brokerage house.

As well as allowing Chinese banks to compete more effectively, partnerships are also advantageous for overseas banks.

By acquiring stakes in China's domestic banks, foreign banks can take advantage of the wide network of branches their local partners have built up in the last decade, giving them quick and easy penetration into the Chinese market.

Li Weicheng, research director at Henda Securities, a Hong Kong-based broking house, pointed out that since buyouts can save substantial time and resources, the buying frenzy will continue.

HSBC bought an 8-per-cent stake in the Bank of Shanghai in 2001 and this year it started offering credit cards with its local partner. HSBC's China profits more than doubled to 324.7 million yuan (US$39 million) last year, the bank revealed in April.

"HSBC could get access to the Chinese market without building outlets itself by joining with the Bank of Communications, which enjoys a nationwide network," said Zheng Yong, a manager at the China Construction Bank in Shanghai.

"Chinese banks can improve their management and skills by learning from foreign partners."

Bank of Communications operates in 86 cities and has more than 2,700 branches and outlets in the country, according to the bank's website.

In addition, Bank of China and China Construction Bank (CCB) have been seeking overseas investors as strategic partners.

CCB has been negotiating with Citibank and Deutsche Bank and the Bank of China is considering US and Swiss banks.

By law, foreign institutions can acquire up to 25 percent of Chinese banks, with each bank limited to a maximum of 20 percent each.

HSBC has a foothold in China with an 8-per-cent holding in the Bank of Shanghai and a 10-per-cent stake in the life insurance firm Ping An, obtained in 2002 for US$600 million.

Last year, Citigroup paid US$72.5 million for a 5-percent stake in Pudong Development Bank and may raise its share to a quarter by the end of 2008.

As foreign banks continue to buy up stakes in China's banks, they also have other opportunities to further expand their business, such as by issuing credit cards.

The author is an industry observer and contributor to China Business Weekly.

(China Business Weekly June 24, 2004)