What should a China strategy mean to any foreign bank?

Spending as much time as I do in China, I am still intrigued by the steady flow of foreign banks from around the world that find China alluring as a frontier for their business.

In the past 2-3 years, consulting firms have been telling their clients that they have to have a “China strategy.” Dominic Barton has been McKinsey and Company’s greatest publicist on the topic, with his now famous edict to his clients, “If you don’t have a China strategy, you are….” whatever suits his Anglo-Saxon deterministic imagination. More recently, he expanded his call to “all banks must have an ASIAN strategy.” He said this at the SWIFT annual meeting in September 2009, a call that mirrored his own promotion to global head of something or other in his firm.

Another proponent of this idea is Andrew Sheng, originally Malaysian of ethnic Chinese origins, but who made a distinguished career in Hong Kong’s financial industry. He is currently chief advisor to the China Banking Regulatory Commission. He advised a medium sized bank in his home country, Malaysia, a couple of years ago on the possibility, but not on the execution. They took him to heart and bought into a smallish bank in Yingkou in Liaoning province last year.

Now, Yingkou is not a major city in China by any measure. It is not Beijing, Tianjin, Shanghai, Chongqing, Nanjing, Dalian, Xian, Xiamen or any of the major cities you would be able to point out on any decent map of China. It is not even any of the major cities in the Liaoning province it comes from – Shenyang, Dalian, Huludao, Anshan, Fushun and even Dandong are all larger. It is a small fishing village by Chinese city standards.

The nearest regional airport is a three hour drive, and that is after a one hour flight from Beijing to Shenyang or Dalian. It’s frozen solid more than three months in a year, with temperatures at -25C, compared to tropical Malaysia’s year round +32C.

Couple all these odds with the fact that the bank is owned by Malaysia’s Muslim majority government that has been actively taking the country in a diametrically different direction to align it with the Middle East instead of China, and it makes you wonder, what in the world were they hoping to achieve?

The bank did say lamely that it was interested in introducing Islamic banking in northern China, something that rings hollow. But that in essence is the extent to which a number of foreign players who imagine that there is something to win in China have been willing to go – way off the plank of reason.

This same story is repeated in banks from a number of surprising countries – Australia, Spain, South Africa and even Argentina, as they ask themselves: “What is our China strategy?”

The approach of McKinsey, the consulting firm, is itself symptomatic of the Anglo-Saxon approach to China. The firm hires hundreds of entry level consulting staff, invests millions of dollars in training them (sending an entire generation of young graduates – from a country where its young people have never had known consulting as a career – to INSEAD in Singapore, to that McKinsey training centre in the Austrian alps, to the US and so on). An investment that McKinsey has never made in all of the other countries it derives even more valuable business from.

To this day, Chinese corporate clients have refused to pay McKinsey’s international level fees, so you wonder on which date the firm ever made money on its investments in China. It can be argued that advising foreign companies on entry strategies into China or Chinese companies seeking access outside the country pays the bills. Which in turn validates the unintended consequence of building a China business the Anglo-Saxon way – the real business might come not from within China, but from being a bridge between China and the outside world.

McKinsey has never taken this long term approach in any other country, not even in India or Indonesia, where a string of good, long term and stable client-base pays the full international fees or nothing from day one – and no, McKinsey never trained hundreds of Indian or Indonesian entry level staff the way it has in China.

In the process of course, the Chinese kids that McKinsey trains then leave and set up their own local Chinese consulting firms, bring international quality to China, go back to the same Chinese corporate clients, charging them fees that are more sustainable and become competitors to the very McKinsey that trained them.

When I think about the way in which McKinsey actually created the consulting industry in China, I always ask myself why American businesses think this way about China. Never has western civilisation been so benevolent to any other civilisation in history as they have been to China, giving and giving and giving in the hope of some tangible return in the distant future. The success of China as an economy has as much to do with this benevolence as it has to the strong leadership in the country.

On the other hand, the Germans and the Indians would come across as very severe people, by Chinese standards. They don’t smile very much, they are hardnosed, they do not know how to take this “long term approach” and “investing in China” and waiting for profits that never come. The French are even worse, very argumentative and difficult to do business with. But the one trait that all three have in common is that the value of the trade is the value of the trade for now, not for tomorrow.

If someone bothered to study the profitability of German, French or Indian investments in China, I suspect that they will find them much more profitable, even if they are smaller than US or British investments in China. In fact, the Indian outsourcing companies can say more than any Western consulting firm that their services are actually paid for at market rates by the Chinese government.

Of course, the Chinese government does this to entice the Indians to set up shop in China with a view of learning from them and building a domestic outsourcing industry that could someday beat India. Whether the Chinese will be able to actually beat the Indians in software skills is a separate conversation. The important point is that when you remove all the fluff, the Indians are being paid, while the Americans are paying for the experience of being in China. Anyone who runs a business with his own money will judge who is the wiser.

Likewise, the German companies Siemens, Volkswagen and Mercedes Benz make money in China, but GM does not. French-owned Carrefour makes money in China, but US owned Walmart does not.

Not that there are no German, French and even Indian businesses that do not take what I call the Anglo-Saxon benevolent approach to China, there are many that do. But the ones that really succeed are the ones that have been hardnosed from day one.

Around this question of what it takes to succeed in China are so many erroneous and downright false assumptions about what China is and what foreigners can realistically expect to achieve in the country that I thought I should list down some first principles about China to help anyone even thinking about the topic.

i. China is for the Chinese, the foreigner should focus instead on financial profit

Even in my own business, from day one of doing business in China, I have always assumed that the end game for The Asian Banker China is to be owned by a suitable Chinese manager, and is viewed by its Chinese clients as a local company. Sure, there should be some kind of profit share or return on investment to the parent company that capitalises it, but that is as a far as it should go.

I have no illusions that I will be a star in China. I have been treated with the utmost regard and the fact that I spend so much time here, I am taken very seriously by the industry. Often, I am told by regulators and bankers alike, the value that The Asian Banker has brought to China’s banking industry. But always the greater distinction belongs to a Chinese professional who can grow with and be the face of this entity called The Asian Banker China.

Likewise, if you are a bank and you want to succeed in China’s domestic business, no matter what your product sets are – wealth management, retail banking, corporate banking, investment banking, treasury or trade – you have to have a Chinese professional eventually becoming the face of your organisation in China.

If we keep to this simple rule, then a lot of fluff gets thrown out of the window. In the early years of buying into Chinese banks, Citibank had first invested nine percent into Shanghai Pudong Development Bank (SPDB), hoping to be allowed to buy more into the bank if it made a difference.

Even as Citi was trying to tell the world that it was making a big difference to SPDB, the SPDB staff were giving briefings to my staff on how they were creating parallel businesses to the joint ventures they had with Citi in cards and wealth management, in the hope that when the Citi deal finally ended, they would have internalised the best practices for themselves and become the Citibank of China.

As the business prospered, Citi tried to increase its stake in SPDB, but the 140 or so domestic Chinese corporate investors that the bank had would not allow them to. That was the first time that Citi learnt that all things Chinese will remain Chinese. This should not come as a surprise to any American doing business in any large country – be it China, Korea, Japan, India and even in the US – but surprisingly they are surprised every time. The national desire for self-sufficiency is strong.

If Citi kept its focus on the financial benefit of being an investor in SPDB, as HSBC does with BoCOM (Bank of Communications) it would not have been disappointed. Sure the private equity player Newbridge did do an outstanding job in transforming Shenzen Development Bank into an investible asset over the past three years. So, now it is negotiating to sell SDB to a convoy of local investors for a profit and that will be the end of that.

The opportunity for this kind of short term value creation and exit strategy for profit is highly sustainable in China, and there are any number of such opportunities coming up in the years ahead. In fact, the Malaysian bank should be thinking in this way about the bank in Yingkuo – like a private equity player adding value and then selling to get out at a profit at the first opportunity.

I have always been willing to help any investor, whether banks or private equity (although I must say that the regulator, CBRC, is very prickly in allowing foreign private equity the kind of access it gave to Newbridge) to find a local bank where it can make a difference and exit at an appropriate time.

Foreign banks that dream that they can build a China strategy that is a huge adjunct to their own domestic business in their home country are not thinking about the domestic instinct for self-preservation that is very strong in China. The Chinese welcome foreign technology and foreign capital, but only so far as to help them develop for themselves.

ii. Understand the magnitude of what China is, and deploy your capital wisely

The question then naturally arises, if banks like HSBC and Hong Kong’s Bank of East Asia which are organically growing their branch networks in China, are doing the right thing. The short answer is that only a few foreign banks will ever be able to justify an organic strategy for China. All others must keep to a financial strategy and no more.

We must first understand the magnitude of what we are dealing with. HSBC has a few hundred branches in China. The second tier national bank it competes with have in the magnitude of 1000 branches each. There is no way a foreign institution will be able to grow to this size profitably. Don’t even think about China’s big four banks which have in the magnitude of 20,000 branches each – that is larger than any banking system in any other country in the world.

HSBC shareholders would have blown the management out of the water if it was seen to be deploying capital to grow organically in China to fight a war it will never win. Chinese regulation does not help them either, limiting what they can do with their domestic liabilities base.

Fortunately for HSBC, there is this temporary respite in the form of growth in its treasury, forex and investment businesses in China. Another form of unintended consequences because HSBC does not make money from the domestic branch business that it is building in China. It makes money from being a provider of foreign trade and investment services to Chinese corporate and FIs. So the money it is making at the moment is not commensurate with the areas it is investing in right now. This mismatch will continue for a long time. The branch network tells Chinese corporate and consumers that HSBC is committed to China. But it is left to HSBC to find out where it can make the real money from.

In the case of Bank of East Asia, China is its hinterland. There is no other hinterland that it is ignoring in favour of China. So, being the largest “really local” bank in Hong Kong, the next frontier for the deployment of its capital is China. A bank in Chile or a bank in Nigeria does not have this option to make.

Neither do banks from the US – when Bank of America had to consolidate its capital as much as possible, it had to sell some of its investment in China Construction Bank. As long as it is a financial investment and somewhat liquid, this is the position that banks far away from China should take – be as liquid as possible.

In the case of both banks, seeking domestic listing in China also means that they will increasingly ring fence their China business with a China P&L so that they become truly Chinese. There may be some arbitrage to benefit from being listed in two or three different markets, but there is also the danger that the domestic P&L might just not be enough to sustain the local business.

Becoming local as HSBC and BEA aspire to may appear to be the holy grail to others considering a China strategy, but it is a very expensive one and that only a very few banks with close historical connections with China can contemplate and no other. Not worth breaking the bank to build.

iii. The country changes every six months!

Which brings me to the next point about any strategy for China. Please be forewarned: the country’s dynamics changes every six months. Even the senior people you work in the regulatory agencies and counter-party banks, will change every 9-18 months. There are no rules in China, only opportunities – and you have to define them as you go. It is tiring and very energy and time consuming, but that is what it means to be in China.

As I illustrated in the case of HSBC today, the area where it is currently making money is not the area in which it is building what it hopes will become a stable, domestic and organic business. Even that will change. Already the Chinese regulators have been putting the brakes on foreign banks access to derivatives trades and transactions in the domestic money market.

A whole range of conflicting scenarios await China in the next two years: China is under tremendous pressure by the G7 and G20 to revalue its currency upwards, which will dramatically change its cost-based export economy. In the meantime, the strengthening of domestic consumption on education and health will change the behaviour of the local people forever – but how, nobody knows as yet. The stock market needs to be divested of its state-owned holdings, but to whom will the state sell? Domestic banks need to create greater depth to their capital market and wholesale banking businesses – but how? Some deep dark secret about provisioning and NPLs might just leap out of the blue and the ominous signs are already there in the way the asset management companies have been ever-greening the poor quality assets from the 1990s.

The top management of foreign banks in their head office scratch their heads because their boys in China are not building sales pipelines that can provide some stable prediction of what China’s contribution to the overall bottom-line would be. Well, HSBC’s 2008 numbers suggested that China business was the 4th most profitable contribution to the group bottom-line, except that it was not in the businesses they were building.

The permutations and combinations of the different challengers makes it impossible for any foreign player to know which ones to focus on. So, by and large, all astute foreign players have several balls in the air at any one time, so that if something becomes profitable for about six months, that is good. Then you move on to the next opportunity and then the next.

The most important good thing that can be said for the foreigners who have been here awhile is that there is no substitute to spending time here to learn how fast things move. All newcomers have to learn the same ropes. You spend time networking and networking and networking as broadly as you can, and then call in your contacts as the opportunities develop.

The banks that have been here longer have learnt for example, that the domestic wealth management business is not what it was imagined to be. As long as you are onshore, you will lose out to the large domestic banks that provide better rates and better service. The only reason the wealthy in China would even consider foreign banks is to invest offshore. So, the HSBCs and the Standard Chartered Banks in China have had to rethink their wealth management businesses in China in the past six months.

Interestingly, for all its lack in a China business, Singapore’s DBS Bank does have a steady wholesale and corporate business in this country that has been generating decent returns without investing too many smart people (not that it has too many to spare for China). For the most part, that is what any foreign bank without the capital and intellectual bandwidth to expand in China should just focus on. Keep the candle burning and bring it to live when required.

But there is no substitute for having a man on the ground and tracking the changes as they take place and learning, because this place changes constantly.

For those of us who have been here since 2001, one of the benefits of being early birds is that we have established brand names in China. I established The Asian Banker in China in 2001. At that time, the Chinese bankers were very humble and would say to us “you bring expertise and we want to learn from you.”

Today, the Chinese banks are confronted with the possibility of being as strong if not stronger than almost all the major US financial institutions. I gave a speech at China Merchant Bank’s brand conference last month, and my friend the chairman, Ma Weihua, said to me, “I was in the US and someone showed me a magazine (I believe it was Fortune) that said that my bank had the fastest growing brand (in value) in the world!” There is no need for them to be humble anymore.

They look to the left and to the right and see no one who is their equal. Most things they could learn from The Asian Banker, the McKinseys, the HSBCs or any of the international institutions, they have already internalised – in retail banking, in risk management, in corporate governance – if not in substance, definitely in form.

But because we were here earlier, we are now “one-of-them.” The Chinese have accepted us as being part of their long journey towards the future. This opportunity for internalising foreign brand-names in the financial services industry into the Chinese psychic is now closed. There are names coming after us, the reputation of Banco Santander from Spain, for example, is one that the Chinese are beginning to respect because of what they hear in the global marketplace. But they come as a second or third wave, whose reputation has to be validated to the Chinese by those of us who have been here longer, and so it goes.

There again, maybe it can happen still, if Banco Santander pioneers something in capital markets as China opens yet another area in financial services. Every phase has in the evolution of this country will present an opportunity, but you can see that the new doors are opened less widely to foreigners then the ones before.

iv. You don’t need to be Chinese to succeed in China – you need to be damn good, that’s all!

In a number of banks, especially in Asia, there is this assumption that a bank or business should have an ethnic Chinese CEO or at worst, a westerner who is agreeable to China to succeed in China. I was asked several times by readers of this blog if DBS Bank in Singapore can have a China strategy since its incoming CEO is ethnic Indian.

We must remember that Jackson Tai, the previous CEO of Singapore’s DBS Bank was American of ethnic Chinese origin, but he was never interested in China. He side-stepped the China question the two times when I asked him “what about China?” He was never comfortable with the country, and I know several ethnic Chinese foreigners who like him, are not interested in this huge country even if they are Chinese themselves.

Also somewhere in the imagination of some people is the idea that the Chinese welcome Americans more than they do any other ethnic groups. Sure, the Chinese name for America is “mei guo” (the beautiful country). But living in Beijing, as I do 10 days a month, I have come to see that this sense of superior access is so false as to be a farcical figment of foreigners imagination.

I would even argue that there are more French individuals – who with determination and commitment – have developed greater access to the top people in China than many Americans have. This despite all the antics that the current French president can present China on the foreign policy front.

The CEO of DBS after Jackson Tai was an American ex-Citibanker, and he was pitched to the Singaporean public as someone who will build the China business. Little known to most people outside China, that by that time Citibank had been making such a mockery of the tremendous goodwill it enjoyed in China, that coming from Citibank had become a liability to succeeding in China.

China Construction Bank had given Citibank, and no other, the mandate to find it a strategic investor prior to its listing, or to become one itself, but the bank sat on the mandate for almost a year, before CCB found Bank of America and Temasek as strategic investors through another channel, one after the other. After that, ICBC and ABC would not even give them the time of the day.

I interact with the Chinese in a variety of settings, in business and in social life and the sense I get is that they like people who are good at what they do, no matter where they come from. Whether it is a Latino salsa dancer or an Nigerian soccer player or an Indian holy man – I have watched how the Chinese have time for all of these.

Those of us who relate to Chinese people as insecure ethnic minorities in our own countries, just can’t fathom that a country of 1.3 billion people has all the depth, diversity and confidence as any multi-cultural country.

The only caveat I would make is that it is so very sad to see Chinese leaders still using their “ancien regime” mindset from 600 years ago when dealing with their own minority people. It is a fact that it is easier for an ethnic minority from almost any other country to play an important role in China’s mainstream than it is for one of their own minority people.

Having said that, the Chinese like it better if a foreigner is able to beat their own system, because in many cases, even they can’t. One of the amazing value that The Asian Banker brings to China is that we are accepted both in Beijing and Shanghai, both competing cities. This year, after concluding our Asian Banker Summit in Beijing, I was asked by the head of the CBRC in Shanghai to bring the Summit to his city. That is why I was not surprised to hear that Shanghai now wants to bid for the 2020 Olympics – it is just like two countries competing with each other.

So the question we should be asking about the new Indian CEO of Singapore’s DBS Bank is whether he is international enough, sophisticated enough and demonstrates enough value to stand on his own with China. By extension, DBS Bank itself should be international enough, sophisticated enough and demonstrate enough value to be respected by the Chinese. If DBS fails in China, it fails on this point and no other.

On this point, it is the Chinese-Singaporeans who never fail to irritate me every time with their patronizing provincial posture. On more than one occasion, I have run into well-meaning but completely blind-sided Singaporeans who think that they have a special pre-disposition with China. It must come from what they read in their own newspapers back in Singapore, that:
– Lee Kuan Yew has a special status with the Chinese leaders (which he does, but on account of his personal standing first and Singapore second. It is his chemistry with Chinese leaders that wins him over and gives him the stature to be trusted on very sensitive topics. Chinese leaders take individuals as they come and weigh them accordingly, it does not matter whether they come from a small or large country – we make the mistake of thinking otherwise. On this score, Hank Paulson and Sonia Gandhi have their own goodwill – the Chinese leaders have time for individuals with whom they have “guanxi”. These individuals then go on to deliver what they said they would, but the chemistry comes first.);
– that China look up to Singapore (mention the word “Singapore” to any Chinese on the street and the two word description that will come out are – “beautiful city (pause) … small” – guaranteed 99% of the time! The Chinese admire those who have made good for themselves, but it is not the same as saying they look up to them – in this regard the Chinese look up only to themselves! and;
– that Chinese-Singaporeans have this amazing ability to connect China to the world by being able to speak Chinese and English well (by this point, they are hallucinating, because the Chinese do not need any such help!)

Singapore, Switzerland, Turkey or Tunisia are all assessed equally in China for their unique qualities and every day that the Singaporeans imagines that they have a special disposition with the Chinese, they could just as well be living on another planet.

I say this with the personal experience of being take seriously in China and the access that I have had with a wide range of senior people who give me the time of the day. Some I have met only once, but it is that first and only meeting that sets the wheels turning. It is the chemistry first, and proving the value second. In some cases, the relationships even mature as we enter disagreements with strong minded officials and come out the other side stronger. You have to go through that phase before you know that you are accepted.

The Singaporean newspapers put their senior government officials on the “do you have the China Factor?” test. In my mind, most don’t, no matter how good their spoken Chinese is. Language is the wrong test. In fact, being a non-Chinese is better because the small efforts I make to say a few Chinese words well is given much more credit than if I was Chinese and could not speak Chinese like a local.

Having said that, Singapore did make a huge impact on China’s state administration at a time when they were modernizing the bureaucracy in the early years in the 1980s and 1990s. When you queue up at the immigration office in Shanghai or Beijing to renew your employment pass, and see that the system works smoothly like Singapore’s, and not in a constant mess as the ones in London or New York, it is because it is based on what hundreds of senior Chinese officials have learnt from attending Civil Service school in Singapore. They learn from anyone worth learning in this regard.

Having said that, the Chinese do not put up a plaque to say “we thank the government of Singapore for teaching us these things,” they never will. The locals don’t even know that these best practices come from somewhere else. They think it is made in China. Such is the lot of anyone who wants to “help” China.

But in one sense, this is no different from “helping” the United States today – you know that a phenomenon or a product can only become global if it succeeds in America in a way that the Americans think that they own it. One day it will be the same with China. In fact for small countries like Singapore that want to be tied to China, that day of feeding the monster has already started.

One thing that the Chinese do all the time is to corroborate someone’s reputation with others more knowledgeable than themselves. I saw them do this to their knowledge of wine, when wine drinking was new in China and no one knew anything amongst them. The Chinese had no clue what to look for but were quick to learn just by accepting what the so-called experts in the wine industry suggested – and the South Africans have a special place in China in this industry. It is very interesting to note that today, there are thousands of wine collectors in China, even if they still do not necessarily know enough about wine.

So, if you are an Indian priest, and they are interested, they will check with the religious community that can validate it. If you are a Nigerian soccer player, they will listen to what the Brazilians and Argentineans say about you. If you are DBS new CEO, they will ask the guys from Morgan Stanley or Goldman Sachs who are permanently stationed in Beijing (right in front of where I live, to be precise), “do you know this guy?” and if they do not, you start on a limp straight away. What is nice is that if you do check out, they will take you at face value, until you are proven otherwise.

The initial assessment of the new DBS CEO is that he has proven himself in domestic markets in Southeast Asia. He has not been in the Asia Pacific role at Citibank long enough in order to make a conclusive judgment call on his international standing. The Chinese will find out all of these, and for this reason, and no other, he will have an uphill task.

At the same time, even if the Chinese may not like the guts of someone like Lakshmi Mittal, because he is an ethnic Indian and not Chinese, and has managed to corner the world’s steel industry, they invite him to take a stake in a smallish local steel manufacturer. The leaders here have all the time for Mittal, although he drives a really hard bargain – none of the silly American idea of “we will invest for the long term and dream about a day when we will become rich” stuff. From what I hear, he is difficult for any government to deal with, but that is because his eye is on the profit for today, not tomorrow.

They may also not like Steve Jobs and the iPhone, because they have local versions that they hope will dominate the world. So, they give him the time of the day, and allow a joint venture to bring the iPhone into China with the country’s third largest (and not largest) mobile company. As they say, the Chinese know how to keep their friends close, but keep their enemies even closer – a strategy that the Anglo-Saxon mind, with its didactic view of the world, will never phantom.

From a personal point of view, this is actually the quality I like most about China, because it forces even me to be really good at what I do to be taken seriously here. China’s relationships at all levels – with individual people, companies and countries – is based on this assessment. I know it sounds utilitarian, but for those who us who like rising to a challenge, China keeps us honest, even for ourselves.

I also think that this is how all small countries should think in a post-American and a China-rising world. If for the most parts, China is likely to be a huge sucking machine that is able to dominate world trade, then it is incumbent on all small countries to re-focus on a value proposition that is unique to themselves that the Chinese will not be able to copy, but would buy from.

For countries like Australia and South Africa, that may well be their raw material. But for countries in Southeast Asia, it may be tourism, trade, professional services, stuff like that. Countries that want to pin down capital and skill intensive industries that can outdo the Chinese, whether it is the cuckoo clock or precision instruments, the planning should have started seven years ago, for the distinction to be made in 13 years time when China and not the US, will shape world trade.

There are many things that China will never be able to accomplish on its own for a number of reasons – its state-run school system is designed to churn out high averages but not geniuses (all the ethnic Chinese Nobel prize winners in the sciences todate are from countries outside China, strangely even if they were born in China). State-ownership of all key industries means that service quality will be consistent but not great – giving great scope for entrepreneurs from other countries to plug in the gaps. Management principles are applied but not excelled in, because of the uniquely hierarchical structure of Chinese corporate culture.

There are also ethnic limitations – as much as they try, the Chinese will never be able to sing as well as the Filipinos or run like the Africans or tell stories like the Indians (the most important epic stories in China trace their origins to Buddhist scripts from India). All of these present a number of opportunities for people and countries where they can make a difference and sell beneficially to China.

iv. China is not one country

The point I made earlier that a country of 1.3 billion people is actually as diverse as any cosmopolitan country of diverse people is an important one. In fact, Denmark is far more homogenous than China in securing ethnic consensus to hate foreigners. You will never get that kind of consensus in China, because there is sufficient diversity in tastes, in outlooks to constitute large enough economic sub eco-systems and counter any negative trend.

Even if you studied the dynamics of the Boxer Uprisings of the early 20th century, you will find that history has overlooked the fact that the scene comprised of several sufficiently large but competing Chinese communities: not just the Shandong “boxers”, but the Chinese Catholics, the Chinese Protestants, the Chinese Greek Orthodox, the Chinese traders, the Chinese royalists, the Chinese republicans – China had become very cosmopolitan even by that time.

The people in the port cities of Shanghai and Shenzen have always been and will always be far more open to foreigners than those in other parts of the country. What failed in the era of the Boxer Uprising was that China had an imperial government that did not understand, let alone have the means to manage, the diversity in its own country. There is reason to be concerned that a single party system today will also find it increasingly difficult to manage that diversity. This is the kind of thing we have to keep our fingers on and monitor closely.

Doing business today in Beijing is so different from doing business in Shanghai and different again in Nanjing or Chongqing. There is no reason that a foreign bank that fails to get a licence in Beijing could not provide white labelled cash management or payment services to financial institutions in Fujian province where the banks may be so very grateful to foreigners for the service. Success or failure in one province cannot be transposed to success or failure in another province.

Which brings me back to the case of that Malaysian bank in Yingkuo. Before you think that there is a way to justify selecting a seemingly friendly part of country to invest in, the final point that must be made is that you have to read all the above points together when assessing a strategy for success in China.

Owning 20% of anything can be pure purgatory. It is not large enough for the upside potential to feature strongly on the parent bank’s books, but it is large enough for the downside risk to drag down the parent bank with cash calls. That is why it is incumbent on any foreign bank wanting to own 20% of anything Chinese to have the exit firmly in mind – this includes constant good relationships with potential domestic suitors, whether it is Ping An Insurance or the local city government who will take it off your hands as soon as the time is right.

I know that we will learn more in the years ahead, but busting a bank for a minority stake in this huge country is not the price you would want to pay to learn, no matter what your perception of the promise of profit from this land.

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Comments

  1. interested observer from india

    I think most international banks ( esp American – 5 to 10 yrs ago ), made the mistake of under estimating the governments committment to address the under banked sector and the support they would get in that activity. So if the conversation went like ” how can we jointly work to help the rural sector develop through banking services” , rather than ” how can we get 10 branches in your country” – the answers would be different-and therefore value

  2. julie from singapore

    really insightful and enlightening. always a pleasure reading your perspective, though i'm not from the financial services sector. cheers.

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