Question

In: Finance

Business is booming for banks in Mainland China. The banking industry recorded a strong growth in...

Business is booming for banks in Mainland China. The banking industry recorded a strong growth in lending in recent years. According to the findings by the Chinese government, increased lending in local currency was extended mainly to retail customers by Chinese banks while foreign banks focused their lending largely on corporate customers.

(a) Many foreign banks are actively developing their businesses in Mainland China. Critically discuss three major business considerations behind their strategies.

(b) Many local banks in Hong Kong are also pursuing expansion plans in Mainland China. Will this industry trend undermine Hong Kong’s status as an international financial centre? Explain your view in detail.

Solutions

Expert Solution

(a) The major reasons for foreign banks to expand their business in Mainland China are the following:-

  • Pickup in business activity in China and strong GDP growth which attracts businesses and increases the scope of lending.
  • China boasts a large population base and hence by increasing the network, foreign banks can also diversify into retail and consumer banking thus increasing their businesses further.
  • Another major business strategy for major foreign banks is to find a place to grow where the policy rates are not very low, which is the case in most of the developed world. So they can use the liquidity-fuelled surplus cash to invest in regions which are growing and propel their earnings growth through diversification of markets.

(b)

The decision for local banks to expand beyond Hong Kong to Mainland China will not undermine Hong Kong’s prominence as the financial center as most of the business centered around investment banking, international trade financing and issuing new securities would continue to happen out of Hong Kong.

The decision of local banks to diversify into Mainland China would only expand the formal banking structure into China and replace the shadow banking which was prevalent in China. Also, the primary focus would be targeting consumer and retail investors and with a large population base, this is expected to grow considerably.


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