Foreign banks have long bemoaned the lack of control over their joint ventures in mainland China, and have often blamed poor market share growth on it.
However, despite the liberalisation of the Chinese market, foreign banks are still struggling in the country.
The Chinese government intends to allow foreign banks to take a controlling stake in joint ventures on the mainland, it was revealed earlier this month.
Currently, foreign banks can hold no more than a 49 percent stake. Although this move has been welcomed by foreign banks, these restrictions won’t be lifted for another three years.
China’s attraction for foreign banks is obvious: it is a very large market that is becoming more prosperous.
However, new market entry is never easy.
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By GlobalDataDifferent customs, different customer demands, different banking infrastructure, and of course a tiny branch network relative to domestic competitors all add to the list of challenges that new foreign entrants face.
This last point has been a serious impediment for foreign banks and is directly related to the restrictions on controlling stakes.
Essentially it has forced foreign banks to start building their branch networks from scratch.
Although permitting foreign banks to take a controlling stake in a joint venture could allow them to pursue an acquisition-based growth strategy, there are other challenges.
GlobalData classifies China as a medium opportunity market and is ranked ninth out 29 global retail banking markets. One of the clear weaknesses China has is in banking infrastructure.
While the depth of credit information in China is high and comparable to many developed Western markets, the problem is the low level of credit coverage.
Only a small proportion of the population have good credit information.
The likes of Citibank, HSBC are not attempting to grow their business in the outer reaches of rural China where credit coverage is low, accentuating the competition for the urbanised middle class and mass affluent customers with good credit information.
Here the domestic competition has the advantage due to their extensive branch networks and established relationships with customers.
However, despite these challenges there are still opportunities for foreign banks.
China scores quite highly for consumer receptivity, according to GlobalData rankings, which gauges people’s willingness to switch provider, their level of dissatisfaction with existing providers, and attitudes towards local and international brands.
China’s high score was partly down to people showing a preference for international brands over domestic ones.
Given that many of the challenges facing foreign banks in China remain outside their control, they must look to play the long game.
It’s now been 10 years since they were first permitted to set up joint ventures with domestic players.
The intention to liberalise restrictions on foreign ownership is a positive step, but in the meantime foreign banks should seek to maintain and build their reputations among Chinese customers, and patiently await the further liberalisation measures on the horizon.
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