Taipei Times (TT): Taiwanese banks are finally allowed to branch out into China, though indirectly. What's going to happen? What are their opportunities there?
Jeffrey Wong (黃偉權): I believe this is the first step. Over time, more deregulation may follow. There aren't many Chinese banks that Taiwanese banks can invest in because many foreign banks have already invested in them over the last five years. There are a couple of mid-sized Chinese banks, what we called joint-stock banks, which aren't entirely government-owned. There might be several city commercial banks that operate within cities because they don't have national licenses.
Taiwanese banks can now go through Hong Kong entities to buy into Chinese banks or they may have their Hong Kong entities enter China the organic way, meaning that they don't buy into Chinese banks, they just get a license and set up branches. If Taiwanese banks could buy stakes in a Chinese city commercial bank or get a foreign bank license, that would be much more direct and better.
PHOTO: GEORGE TSORNG, TAIPEI TIMES
TT: Before more deregulatory policies are formulated to make direct entry into China possible, shouldn't Taiwanese banks consolidate to become bigger, since, as you've suggested, size does matter in order to compete in China?
Wong: First, Taiwanese banks need to understand the economic rationale for getting into China, which is why McKinsey talks about the concept of a "second home market."
Over past 10 to 15 years, European banking has consolidated and moved into cross-border mergers and acquisitions. The first few markets they thought of moving into were actually the neighboring economies as "second home markets," meaning, "Can I have another market with similar consumer preferences, where I don't just take 1 or 2 percent of market share, but similar market shares with what I get in my home market?"
The very first thing is to be very clear about the strategy -- not to be everywhere, but to really pick where you want to go.
China is driven by many economic clusters. It is not one big, uniform economy. It is made up of 20 to 30 economic clusters at different stages of development.
TT: What do you mean by economic clusters geographically? Is it by cities or provinces?
Wong: They include the suburban areas around metropolitan areas such as Greater Shanghai, Greater Beijing and Guangzhou/Zhuhai. Taiwanese banks should pick two to three economic clusters where they believe they can compete.
TT: As a base to begin with in China, shouldn't Taiwanese banks first follow their clients -- China-based businesspeople, who may prefer financial services from home banks?
Wong: When you talk about following your clients, you're talking more about corporate [clients]. On the corporate side, definitely.
But eventually, if you want to build a second home market in China, it is not just about corporate banking. It's the whole range of retail banking including credit cards, deposits taking and so on. If you want to do that, you have to focus on two to three economic clusters, which you can potentially turn into your second or third home markets.
TT: But you're not suggesting that Taiwanese banks duplicate their local experience in China since China could be a very big and different market from Taiwan, are you?
Wong: That brings me to my second point. When European banks thought about their second home markets, they tended to replicate their best practices for the home market in their second home market. For Taiwanese banks, we've talked about how you can transplant your business model in Taiwan to China.
Some banks have been thinking about it, as Taiwan is at least 10 to 15 years ahead of the financial service development in China. And many Taiwanese banks have already localized US-European best practices, which is the core concept. If you're trying to transplant the best practices from the US or Europe to China, that's pretty tough. You need to tailor them to a local context.
And Taiwanese banks have been doing that for a long time. So, the best practice in Taiwan might apply better to the economic clusters in China.
There are still challenges. First, despite similarities in consumer preference and language, the truth is that it is a very different culture. Within China's 20 to 30 economic clusters, customers have different attitudes toward financial products and services. Tianjin customers can be very different from people in Shanghai or Guangzhou.
Take mortgages as an example: Many people in Shanghai buy properties for investment. Up to 40 percent of people within the focus groups we spoke to took out mortgages for investment purposes, compared to, say, 20 percent in Beijing and Tianjin. So, the first challenge is to tailor what you have in Taiwan to China given different regulations, consumers, culture and competition.
Another issue is building up a meaningful network. Every time a foreign bank opens up a branch, it needs to get approval from the government. If you want to open your own branches, it's going to take a long time. Branches are very important in China.
Take the credit card business as an example: Many people still repay their credit cards through branch counters, unlike Taiwanese who repay through their deposit accounts. If Taiwanese banks want to eventually do well in retail banking, they will need to build a network of branches. Also, there's challenge from deposits. There aren't many sophisticated funding instruments if banks want to give out loans.
We talked about following your clients. For corporate clients, true, you need to give out loans. But you also need to fund it through deposits. And there is a 75 percent loan-to-deposit ratio. So, if you have a smaller deposit base, you can't go beyond that.
TT: So, how can Taiwanese banks grow their deposits and overcome all these challenges?
Wong: If they can get access to a city commercial bank with a good network of branches and a ready deposit base, that can help accelerate what they want to achieve in China. The challenge in that is that the window of opportunity is closing. Over the last five years, many joint-stock banks or city commercial banks have already been taken over by foreign banks or investors. So, the regulation has to change very quickly in order for them to leverage this window of opportunity.
TT: If I may, I'd like to go back to the economic clusters part. Two of eight Taiwanese banks that were previously allowed to set up liaison offices in China will be headquartered in Beijing. Does Beijing sound like a good place to begin?
Wong: Beijing has a different role than the other Chinese economic clusters. If you want to do well in China, you need to be on top of the fast-changing regulations and policies. So, many banks will set up rep offices or headquarters in Beijing. But Beijing is very competitive because all the big banks and many joint-stock banks are headquartered there.
In the past five years, even for some of the local attackers and mid-sized banks, which have been much more aggressive in credit cards and retail banking, they've been pretty successful in southern Chinese areas such as Shanghai, where people are more open to foreign banks. Maybe they'll eventually move into another region. But so far, much success -- even for the insurance companies -- has been observed around the Shanghai region and the River Delta region, which is close to Hong Kong.
If Taiwanese banks want to have a foothold in China, going straight to Beijing may not be the right strategy because you're going head-on with big banks and strong mid-sized banks.
In terms of client preferences and sophistication, the Taiwanese customers that banks are used to dealing with will be more similar with those in greater Shanghai, Zhejiang or in southern China. You want to start with something similar. Think about places such as Xiamen or Fuzhou, where even the dialects are similar.
TT: Following Wednesday's Cabinet decision, Fubon Financial Holding Co (富邦金控) will mostly likely become the nation's first bank to enter China, using its Hong Kong subsidiary as a stepping stone -- a strategy that many local rivals such as Cathay Financial Holding Co (國泰金控) and Chinatrust Financial Holding Co (中信金) may have regretted not taking. Is it a good option?
Wong: I will just make a general observation. It is one of many options. Many Taiwanese banks we have talked to have been thinking about using Hong Kong as a gateway to get into China market. Several Hong Kong banks have been doing pretty well in the southern part of China, especially in the River Delta region.
If any Taiwanese banks buy into Hong Kong banks, which already have a client base there, it's good because then you don't have to start from scratch.
But it's not necessarily the only way to enter Chinese markets. As I have said, it depends on regulation [on both sides]. If Taiwanese banks have direct access to a [Chinese] city's commercial banks, that would also be a very good option. If all banks go through Hong Kong, the valuation of Hong Kong banks will go up, which could then become a pretty expensive option.
Furthermore, many foreign banks that are already in China have a long history in Asia. But what we're seeing now is a second wave of European, US and even Australian banks that want to get into China but do not have as much presence in Asia.
They lack experience in Chinese-speaking markets, a pool of management talent they can leverage, or products that can be tailored to Chinese markets.
Maybe Taiwanese banks can think of strategic alliance with these kinds of European and US banks, which already have international experience, expertise and capital to help them get into China markets.
TT: Which leads to the question, which Taiwanese banks are competitive enough to go to China, directly, indirectly or even capable of teaming up with these European banks you mentioned to survive there?
Wong: To be qualified to set up a branch in China, you need to be a bank with US$10 billion to US$20 billion in assets -- depending on types of licenses -- which makes it impossible for many Taiwanese banks to invest unless they partner with another bank.
Another thing is skills. China is an emerging market, where everything is very compressed in terms of development. Over the past five years, credit cards have exploded. Very quickly, the credit card game is shifting to a more skill-based game like what we've seen in the US and Taiwan. Banks need to be market leaders of several products in Taiwan with skills to transplant there and win in China.
For Taiwanese banks that don't have scale and skills, the China story isn't there.
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