5. Timing and Layout in China by Taiwanese Banks
5.1 Market Layout in China
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5. Timing and Layout in China by Taiwanese Banks
Taiwanese banks entering into the Chinese financial market at this stage are to be qualified to offer RMB services to the Taiwanese customer. Although the timing and the operation scale are relatively smaller compared to other foreign financial institutions, the improving cross strait relationships have created a healthier mutual environment and conditions that provide the Taiwanese banks a competitive advantage over its competitors. Moreover, the fierce competition in the Taiwan banking environment and the rising domestic consumption market in China together with the increasing size of the economy have all led the Taiwanese banks to devise an appropriate strategy in China’s financial market.
Moreover by understanding the current problems facing the Chinese financial institutions will be able to assist the decision of selecting the ideal market entry option and strategy. Currently the problems facing the Chinese financial institutions are: 1.
Chinese banks are majorly owned by the State which resulted in the agency relationships conflicts; 2. Lack of corporate governance; 3. Shortage of human resources; 4. Inferior asset quality resulted in lower capital adequacy ratio.
Furthermore, there are 5 aspects the foreign financial institution take into consideration when developing a strategic plan for entering the Chinese market: 1.
Product scope and characteristics-the expansion and innovation of the services; 2.
Target market and geographical boundaries-using internet banking as a tool to address the issue of lack of service networks; 3. Economies of scale- adopting the option of taking ownership stakes in the Chinese banks to enter the China market which obtained competitive advantage compared to other players; 4. Degree of vertical integration-using differentiation strategy in different regions in China as well as reducing undertaking risk and changes in home country’s regulation; 5. Competitive advantage-developing differentiation retail banking businesses to grow niche market
5.1 Market Layout in China
The current regulations for foreign financial institutions entering the market are mainly based on “People's Republic of China on the Administration of Foreign-funded Banks” and “Administration of Equity Investment of Overseas Financial Institutions in Chinese-funded Financial Institutions Procedures.” There are basically five methods applied by foreign financial institutions who have entered the market, such as launch a representative office, establish a branch, set up a wholly
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owned subsidiary of foreign banks, acquire equity stakes of Chinese-funded bank and form a strategic partnership.
(1) Representative Office
It has the least difficulty to establish a business unit in China among all five methods; however the attainable business is limited at the same time. A representative office could build a good relationship between government and business and gathering market information as well as studying local humanities simultaneously. Taiwan banking industry also sees this method as the stepping stone to expand business in the future when entering the mainland market. Subject to cross-strait regulations and follow the Taiwanese business servicing direction, foreign financial institutions take on this method to enter the market because it is less restrictive in time so as to develop more business when transferring into a branch or sub-branch later on.
(2) Branch
Low capital requirement is the primary reason to choose having a branch setup in China (capital requirement is 200 million in RMB). Other than capital requirement, an oversea branch could implement the strategy and direction with flexibility as well as on risk control, for example, sharing the line of credit of Taiwan-based corporations with the parent company. Due to the difficulty for the host company (China) to have operating risk control on foreign institution funded branches as they do not obtain the legal status in China, China government would only open specific area and allow these branches to run wholesale banking business and not the more profitable retail banking. Thus, with the location and customers are constrained, setup a branch would effect overall business expansion for a foreign financial institute due to the waiting period to acquire running the retail business would takes three to five years for every single branch.
(3) Wholly Owned Subsidiaries of Foreign Banks
All wholly owned subsidiaries (subsidiaries) of foreign banks are required to register in China with direct supervision of CBRC (China Banking Regulatory Commission) in order to protect the local deposits and maintain customers' rights.
The subsidiaries thus can operate RMB business without the restriction on location and types of customers because the risk is isolated from their parent companies. Although the advantages of having a subsidiary can have less restriction on operating business and enhance the local supervision by establishing a barrier that acts as a firewall to protect the locals, the establishment requires
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higher capital that would reduce the desire to establish subsidiaries. In addition, only few were examples entering the mainland market by establishing a subsidiary successfully because the attainable business was limit by the asset size at the early stage and subsidiaries are not capable to have direct funding from parent company.
In recent development, Chinese authority encourages foreign financial institutions to promote their branches into subsidiaries by opening RMB retail business and reducing the geographical restrictions, plus the large-sized financial institutions are looking for comprehensive expansion on locations and business, more and more financial institutions have applied to set up a wholly-owned subsidiary bank in China.
(4) Equity Stakes Acquisition of Chinese Banks
Foreign financial institute adopts this mode would need to acquire certain percentage of equity stakes of the Chinese-funded bank through equity purchasing or equity swap to enter the market and business indirectly. The main advantage on this mode would be the institution can enter the market within the shortest time by utilizing the current resources, bases and customers. The foreign financial institute can develop the business or types of products that the institutions are ready excelled in and reach the local market that the institutions are unfamiliar with or no experience in any way at once with the assist of existing resources. The downside about the mode is the complexity for a foreign financial institute to pay the right price on the Chinese bank when acquiring equity stakes given that the operations and profitability may not have the unified standard in the all Chinese banks. In addition, the foreign financial institute would not have the dominance to take operating control as the current law regulates a Chinese bank cannot exceed 20% stake from one single foreign shareholder and 25% overall. Generally, there are two ways for any foreign financial institute acquires stakes on Chinese-funded bank, financial and strategic investments. It can be treated as strategic investment if the equity proportion reaches 5%, which is capable for a foreign financial institute to affect the operating strategies of the Chinese Bank. Therefore, CBRC opens up opportunities for foreign investors with long-term invest interest to acquire equity stake of Chinese banks in order to first improve the operation mode and corporate governance, and then introduce the latest management skill and business expertise to the local financial industry.
(5) Strategic Partnership
Forming a strategic partnership is mainly to have business cooperation, and do not involve with equity swap or transfer. Therefore, foreign financial institute adopts
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this mode to enter the market because it is more flexible on cooperation projects and timing. Both parties can decide the cooperation projects according to their strategic directions and goals with less capital spending and regulation restriction.
However, the cooperation focuses on the business projects merely; and do not have any operating control on each other. General speaking, the mode can be practiced as preliminary cooperation before foreign financial institute acquires equity stakes on Chinese bank officially. This mode is beneficial for both parties to understand each other’s organizational culture, personnel background, business philosophy before acquiring stakes officially and helping each other to attain the goal of total efficiency of operations and profitability.
According to Regulations Governing the Banking Activity and the Establishment and the Investment by Financial Institution Between the Taiwan Area and the Mainland Area promulgated by Financial Supervisory Commission, there are four types such as representative offices, branches, or subsidiary banks or making equity investment for banks, and equity investment for financial holding companies in Taiwan area respectively. When a Taiwan bank applied to establish a branch or subsidiary bank, or make equity investment in Mainland China, or a subsidiary company with over 50 percent of total outstanding voting shares or capital owned directly or indirectly by the bank intends to make investment in Mainland Area, the cumulative allocated operating capital and total amount of investment therefore combined shall not exceed 15 percent of the bank’s net worth at the time of application, and then 10 percent of the financial holding company’s net worth when applying to make equity investment by Taiwan financial holding company.
Furthermore, Taiwan financial holding companies and banks shall follow the statutory requirement for approval to entry model in Mainland China besides the contemplation on the prospect of entering in China and being sound for the development in the domestic financial market. Those requirements are group’s capital adequacy ratio and double leverage ratio after the proposed equity investment, bank’s ratio of equity capital to risk-weighted assets, bank’s ratio of Tier 1 capital to risk-weighted assets after deducting the amount allocated for the proposal investment in the subsidiary bank in Mainland Area, non-performing loan ratio and loan loss coverage ratio during the latest fiscal half year, and term of having established a branch and operated business in a member country of OECD country shown in Table 15.
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By the Regulations of the People’s Republic of China on the Administration of Foreign-invested Banks and Measures for the Administration of the Investment and Shareholding in Chinese-funded Financial Institutions by Oversea Financial Institutions, the requirements that shall meet respectively to establish representative offices, branches, wholly foreign-invested banks, sino-foreign joint venture banks and the investment and shareholding in Chinese-funded financial institutions are enumerated shown in Table 16. According to the Cross-straits Economic Cooperation Framework Agreement which is effective on September 12, 2010, the commitments of Mainland side on liberalization of financial sector are listed on the Annex IV:
Sectors and liberation measure under the early harvest for trade in services shown in Table 17. For the banking and other financial services, to set up wholly owned banks or branches in the Mainland as well as the application to conduct RMB business are listed in the early harvest but without the commitment to the equity stakes acquisition in Chinese banks.
Taiwanese banks provide mainly the financial service for SME of Taiwan in China by establishment of representative office or branch at present. Besides that Fubon Bank (Hong Kong) was on behalf of Taipei Fubon Bank to invest equity of Xaimen Bank around 19.99% with 230 RMB million in November 2008, for those banks that established representative office in early stage such as Land Bank of Taiwan, First Commercial Bank, Hua Nan Commercial Bank, Chang Hwa Bank, Taiwan Cooperative Bank, Cathay United Bank and Chinatrust Bank, they had got approval from Financial Supervisory Commission to set up branch in China in September 2010 and then operated business in December. For the other Taiwanese banks such as Bank of Taiwan, Mega International Commercial Bank, E. sun Bank and Taiwan Business Bank, they continued to set up branch with the reference to the regulation that shall have representative office in the Mainland for more than one year before application under ECFA. The present entry model and location of Taiwanese banks in China are summarized in Table 4.