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In conclusion, both average figures of CAR and Tier 1 ratio of SOCBs in China from 2007 to 2009 were higher than Taiwan top five banks and that reflects banking industry in China has better capital adequacy ability.
Above comparison results of different financial indicators and figures regarding the scale of total assets, profitability performance, assets quality, liquidity management, and capital adequacy ability of banking industry between China and Taiwan are summarized in Table 4-13.
Table 4-13: The Comparison of Banking Industry between China and Taiwan
Items Country with outperformance
Scale of Assets Profitability Performance
Quality of Assets Liquidity Management Capital Adequacy Ability
China China Taiwan
China
China
Source: Prepared by author.
4.6 Development Opportunities for Taiwan Banks in China
For many years banks from Taiwan are keen on exploring financial markets in China, but investment in China’s banking industry is strictly forbidden by our government. The signing of MOU on November 16, 2009 is the entrance ticket and also a turning point for cross-strait mutual financial development; however, it does not mean every kind of banking investment in China is permitted immediately.
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In accordance with China’s〈Regulations of the People’s Republic of China on Administration of Foreign-funded Banks〉, which has set up requirements for foreign banks’ entrance in China. Currently there are three types of entrance approaches for banks from Taiwan to choose, including establishing branches, wholly foreign-funded banks, or cooperate with Chinese enterprises to establish Chinese-foreign joint venture banks (Table 4-14).
But there is another limitation if Taiwan banks want to do RMB business in China, they must have opened business in China for at least three years and maintained profitable for two consecutive years prior to application.
Table 4-14: Requirements for Foreign Banks’ Entrance in China before ECFA
Type
in China At least 2 years At least 2 years Foreign capital already has representative office
Note: Capital can be paid either in RMB or in other convertible currencies.
Source: China Banking Regulatory Commission, http://www.cbrc.gov.cn/english/home/jsp/docView.jsp?docID=
2871.
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Ever since WTO admitted China’s accession in 2001, foreign banks from other countries have cultivated in China for many years, comparing to them banks from Taiwan seem already lost initial opportunities to explore China financial markets;
therefore, if Taiwan banks need to follow the same requirements as other foreign banks do, it would be too late to develop in China.
In order to lower the entrance hurdle for banks from Taiwan, after MOU signing the government of Taiwan soon moved to the next stage of ECFA negotiations with China authority.
After over six months of negotiations, ECFA finally has been signed by Taiwan and China on June 29, 2010. According to the list of early harvest under ECFA, if Taiwan banks want to establish branches or wholly foreign-funded banks in China, the time requirement to have a representative office in China is shortened from 2 years to only 1 year, besides, time requirement for Taiwan banks to do RMB business is also shortened to have opened business in China for at least 2 years and maintained profitable for 1 year prior to application.
Table 4-15 shows that by the end of June 2010, there are eleven Taiwan domestic banks have representative offices in China, and seven of them have set up representative office more than 1 year, including TCB, LBOT, FCB, Chinatrust Commercial Bank, Hua Nan Commercial Bank, Cathay United Bank, and Chang Hwa Commercial Bank, after checking their total assets in fiscal year of 2009, they are now all qualified to set up branches in China.
On June 24, 2010 Financial Supervisory Commission of Taiwan has approved LBOT to establish a branch in Shanghai, TCB to establish a branch in Suzhou, FCB to establish a branch in Shanghai, and Chang Hwa Commercial Banks to establish a branch in Kunshan.
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Table 4-15: Representative Offices of Taiwan Banks In China—2010
Item
Taiwan Business Bank 2010/06/24 Shanghai N N
Note: Y indicates yes; N indicates no.
Source: Financial Supervisory Commission, Executive Yuan, R.O.C., Domestic Banks, http://www.bankin g.gov.tw/Layout/main_ch/FscSearch_BankMain.aspx?path=1614&Type=1. (In Chinese)
As for other small scale domestic Taiwan banks which have not yet or not qualified to set up representative offices in China, in my opinion the easier and quicker way to enter China financial markets is to cooperate with Chinese enterprises and establish Chinese-foreign joint venture banks.
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Otherwise, there is still another option, that is to buy shares of China banks but under current regulations the equity investment proportion of a single overseas financial institution in a Chinese financial institution shall not exceed 20%, and the limit of total shares of one China bank possessed by foreign financial institutions is 25%.31
Although the door to China financial markets is already opened, it is definitely a big challenge for us to compete with foreign banks which have developed in China for a long time; right now the most concerned issue is to find out what kind of business could be suitable and profitable for banks from Taiwan to invest in China.
Figure 4-4 demonstrates that commercial banks in China put emphasis on large enterprises and tend to give loans to them by credit, however, due to the small scale and without government protection, in China Small and Medium Enterprises (SMEs) are often required to provide collateral or guarantee, and consequently in China it is very difficult for SMEs to acquire funds.
Source: China Financial Publishing House (2009), Almanac of China’s Finance and Banking.
Figure 4-4: Credit Forms of Corporate Loans in China—2008
31 See China Banking Regulatory Commission, http://www.cbrc.gov.cn/english/home/jsp/docView.jsp?docID=552.
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Table 4-16 shows that from 2004 to 2009 the amount of loan balance granting to SMEs from Taiwan domestic banks has increased by 42.27% from NTD 2,252 billion to NTD 3,204 billion, and the proportion of SMEs loan balance accounts for total corporate loans in Taiwan also increase year on year.
Most enterprises in Taiwan are SMEs, and SMEs are very important corporate customer base in Taiwan banking industry, and we have more experience of granting loans to SMEs than China banking, thus under ECFA’s list of early harvest China government allows banks from Taiwan to establish specific institutions to provide services to small-scale enterprises.
Table 4-16: Loan Balance of SMEs of Taiwan Domestic Banks—2004~2009 Year
Item 2004 2005 2006 2007 2008 2009
Amount
(NTD billion)
2,252 2,535 2,745 3,005 3,138 3,204
Account for total corporate loans
(%)
37.31 39.33 39.87 41.40 40.51 42.66
Source: Banking Bureau, Financial Statistics, http://www.banking.gov.tw/Layout/main_ch/News_NewsContent.
aspx?NewsID=21214&path=2243&LanguageType=1. (In Chinese)
Once Taiwan banks have branches in China, it will be easier to control the use of funds and operation status of Taiwan enterprises in China, if customers went bankrupt, it also facilitate debt collecting and further to curb financial crime events, e.g. ‘‘Debt in Taiwan, Assets in China’’ which happened frequently in recent years.
Additionally, according to the crude statistics of Taiwan’s Strait Exchange Foundation, currently there are about 800,000 Taiwan business people in China, they need good and advance financial services and sometimes it is very difficult for them to
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obtain from China banks, for example, some commercial banks in China do not provide remittance services for individuals, hence Taiwan business people and their family in China could be the primary customer base for banks from Taiwan to provide consumer banking services.32
Because China is still a developing country, financial markets are highly regulated and under government’s protection, China government has great power to decide what kind of business could be opened for foreign financial institutions, besides the ‘‘hidden rules’’ in China are unpredictable, and adaptation to local conditions and expansion of market share are also big challenges for Taiwan banks to overcome in the future. Now ECFA’s list of early harvest only shorten time requirement of Taiwan banks’ entrance and open business of small-scale enterprises, other business items opened for investment still need further cross-strait negotiations.
In general, the study suggests that in the initial stage Taiwan banks can focus on serving Taiwan enterprises to expand market share of corporate banking and to expand market share of consumer banking by providing services to Taiwan business people, and then gradually extend to local Chinese customers.
4.7 Summary
After comparing different aspects of banking performance between China and Taiwan, the results have showed that banking industry in China has made a lot of progress in recent years, and Taiwan banks perform better than China banks only in the respect of assets quality.
First, in terms of total assets and number of employees, the scale of Taiwan
32 See Straits Exchange Foundation Taiwan Businessmen Information Web, http://www.seftb.org/mhypage.exe?
HYPAGE=/service/service_item.asp&cid=1. (In Chinese)
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domestic banks is bigger than city commercial banks in China but smaller than JSCBs, and the scale of SOCBs are too big for Taiwan banks to compete with.
Second, after comparing profitability performance between banks in Taiwan and in China, figures of net profit, ROA and ROE of SOCBs were higher than Taiwan top five banks in past three years, reflecting that profitability performance of banking industry in Taiwan was worse than China. In addition to overbanking problem in Taiwan has narrowed down profit margins, another reason is that financial market in Taiwan is more open than China, Taiwan banks are easier to be affected by global financial tsunami and further deteriorate profitability.
Third, with regard to quality of assets, although NPL ratios of SOCBs in China were declining significantly every year, but in comparison with Taiwan top five banks, they still had higher figure of average NPL ratio, consequently assets quality of Taiwan banks is better than China banks. However, coverage ratios of SOCBs were much higher than Taiwan top five banks, demonstrating the capability of China banks to cover loan losses is better than Taiwan banks.
Fourth, by comparing three indicators relevant to liquidity risk management evaluation between Taiwan top five banks and SOCBs, the result showed that liquidity of banks in China is better, but Taiwan banks have higher proportion of liquid assets in their deposits and short-term funding.
With regard to capital adequacy ability, from 2007 to 2009 both average figures of CAR and Tier 1 ratio of SOCBs were higher than Taiwan top five banks, and that reflected capital adequacy ability of China banking industry was better than Taiwan banking industry.
In conclusion, financial markets in China are very big and full of opportunities for banks from Taiwan to explore, since ECFA has been signed and currently four Taiwan
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banks got the approval to establish branches in China, in the aspect of corporate banking, Taiwan banks could start business by providing financial services to local Taiwan business enterprises; as for consumer banking, Taiwan business people in China could be the primary customer base for banks from Taiwan to expand market share.
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Conclusions and Suggestions
China has been experienced reform and opening up more than thirty years, but it is essentially a one-party regime and planned-economy country. In the initial period of reform era, banking operation in China was led by government policies, however, since China became a WTO member, and state-owned commercial banks went public sequentially, banking industry in China has been gradually moving from policy-controlled to profit-oriented development.
With growing competition brought from foreign financial institutions, Chinese commercial banks have made a lot of effort to improve accordingly, although the development history of commercial banking in contemporary China is very short, amazing progress has stunned the whole world, and major findings of the study contribute to following conclusions and suggestions.