Opportunities (and Hazards) for China Insiders and Outsiders

Banks are at a critical juncture, said Weihua Ma, former CEO of China Merchants Bank.

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China’s economy — vast, perplexing and still evolving — and its recent upheavals have generated shockwaves of analysis, black swan warnings, and concerns about the nation’s ability to manage fallout.

Dr. Weihua Ma, former CEO of China Merchants Bank (CMB) and a Lulu Chow Wang Senior Visiting Scholar at Columbia Business School, spoke at the Sir Gordon Wu Distinguished Speaker Forum on October 7, 2015. He acknowledged that the banking industry reflects China’s changing fortunes. “Finance and the economy are intertwined,” he told a capacity crowd. “With the economic growth rate at 7 percent, you just can’t have 20 to 30 percent growth (in banking) . . . unless the banks were only dealing with each other. And if they were, they would not be helping the economy.”

From Ma’s perspective, China’s banks are at a critical stage of development. After the last two decades, during which banks could make substantial gains by supplying credit for infrastructure projects and taking advantage of high deposit rates, they now must offer new services, embrace the Internet, and understand that the behavior of typical Chinese bank customer increasingly resembles that of western consumers.

Ample opportunities exist, Ma argued, so long as traditional banks react to the changing needs of customers, make a strong connection to the SME market, and take an innovative approach to developing new products, both via online banking and within their brick-and-mortar branches.

Monitored Chaos

Although the banking sector’s growth has dropped to 2 percent in the first half of 2015, there are bright spots. Wealth management services are robust, Ma said, and there is tremendous potential — and necessity — for Chinese banks to continue to provide services and loans to the SME sector. Assessing creditworthiness is still challenging — China has no equivalent of the US credit scoring apparatus, although Ma claimed one is being created. He praised Wells Fargo, which has developed instruments that quickly assess creditworthiness and can greatly aid microlending, which will be critical to the new Chinese economy.

Shadow banking, which has grown outside the tight restrictions placed on traditional Chinese banks, reflects a double-edged reality. On one hand, the shadow banking sector — the alternate universe of financing that has evolved outside the traditional banks — has exploited a democratized market and met needs of the Chinese economy traditional banks could not. But with assets reaching 65 percent of the country’s GDP, shadowed institutions are on the government’s regulatory radar, Ma said. A certain amount of ‘barbarian chaos’ would ensue as the banking sector becomes more democratized, but Ma sees it as the normal byproduct of two financial systems combining. Shadow banking presents a stiff challenge for traditional banks’ market share, he argued, but they will not destroy them if the banks and regulators work towards coexistence through competition.

Ma did not offer specifics on just how the government would regulate shadow banking in the future. He concentrated instead on explaining how traditional banks can compete directly with under-regulated lenders, large and small, by making a stronger play to understand their clients’ needs. He emphasized the traditional Chinese citizen — who saves, eschews debt, and is wary of loans — is being replaced by a new generation that takes a more sanguine view towards borrowing and creditors. Recognition of this shift, and a smooth pivot towards investment in retail products, is vital to banks’ continued competitiveness.

Innovate, or Fail

A Chinese equivalent of Yahoo! or Apple, Ma explained, will likely begin as a small enterprise that would be hard pressed to raise capital from a traditional bank. Unless the state-regulated banks understand and supply the sort of products these start-ups will need, they either will lose business to shadow banking entities or stifle the creativity that China needs to compete globally.

Ma knows something about balancing risk and innovation. In 10 years he helped transform a one-branch, southern bank with 32 employees into an international powerhouse, with 4 trillion (RMB) in assets and a listing in the Fortune 500. CMB established itself in New York in 2008, during the financial crisis and before most of the Chinese state-sponsored giants. Ma fondly recalled the dry observation of Michael Bloomberg, then New York's mayor: “We’re closing but you’re opening.”

International expansion is a requisite for Chinese banks, Ma argued, and that will mean coming up to speed with international standards of operation, branch design, and even fashion. But there is no reason the Chinese must defer to the authority of more established players. During the question-and-answer period, he mentioned the early success of CMB’s dual-currency credit card, which attracted Citibank and an offer for partnership. CMB turned it down, unwilling to relocate its operations to Singapore, and fearful that the success would then accrue to Citi. “I’m glad we resisted that offer,” he said. Other Asian nations have had success with this product, and he followed their models instead.

Responding to a question about the climate for foreign banks in China, Ma asserted that internationals can continue to do strong business, even if the economy continues to grow at a comparatively modest 6 to 7 percent. “Just don’t try to break into our retail banking,” he advised. “We’d destroy you.”

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