Foreign Banks in China Case Study

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The banking industry in China is essentially run by the state. All of the major banks are state-owned enterprises, and all are heavily regulated by the central government There is a central bank, the People's Bank of China, and a regulator for merchant and retail banks. There are13 national-level banks along with over one hundred city-level banks. Most banks today compete with each other, even if they had niches when they were founded -- for example, the names Construction Bank, Agricultural Bank, etc. reflect the roots of those banks, but they have long since expanded out of those niches. But because they are all state-owned banks that are ultimately overseen by the central government, they do not compete intensely with each other.

The biggest factor that attracts foreign banks to China is the size of the market. Even though there are many restrictions for foreign banks in China, and these restrictions limit their market shares, a very tiny share of a very lucrative market is still valuable. Moreover, there is the sense that China will continue to open as a market, and that gaining early mover advantage will be valuable once the market opens up more. Foreign banks envision a day when they will be glad that they have started to build their brands, build relationships and acquire market knowledge in China, because they will be ready when the market opens up. Lastly, they also see that there is opportunity to build their brands with wealthy Chinese.

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These are people who seek to move money around, and out of China if possible, and they are able to do this by working with foreign banks. So there is a mutually beneficial relationship that foreign banks seek to exploit with the Chinese people.

For a foreign player, there are advantages and disadvantages doing business in the Chinese market. A foreign bank offers more security to wealthy Chinese, who value security and a possible exit strategy for their money. This is a significant attraction. The Chinese government also wishes to have some foreign banks in the market, in order to gain some knowledge transfer, learning from the expertise of these foreign banks. But there are a number of downsides as well. Chief among the downsides is that foreign banks simply do not have that many privileges in the Chinese market. Even HSBC, which has a long history in the country and is the largest foreign bank, does not have anywhere near the privilege that a domestic Chinese bank has. So a foreign bank will always be kept at arm's length by the regulators, which presents challenges in terms of being able to compete and being able to earn a bigger share of the market.

3. The idea of crossvergence is positioned as a solution because it aligns better with….....

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