Foreign banks optimistic about reform

Foreign banks believe that they will benefit from China's reforms, even though their market share is expected to remain limited for some time, PricewaterhouseCoopers (PwC) said at a press conference on Tuesday.

"Foreign bank CEOs are broadly -optimistic that forthcoming reforms will create opportunities for them," Raymond Yung, financial services leader at PwC China, said at the press conference, citing a new PwC report released Tuesday.

The report is based on a survey of 37 foreign bank executives in China, and was conducted from September to October 2013.

However, the executives are still uncertain about how these new policies and regulations will be applied to them, said Yung.

While Chinese banks regard the forthcoming interest rate liberalization as a great challenge, because it is likely to increase funding costs, foreign banks are expected to benefit as it plays to their strengths in terms of pricing risks and management of liquidity risks, according to the PwC report.

Internationalization of the yuan -represents another growth opportunity for foreign banks, as overseas companies increasingly use the yuan for trade settlement and invest yuan they receive, PwC said in the report.

Global transaction services organization SWIFT said on December 3, 2013 that the yuan had overtaken the euro to become the world's second-most-used currency in trade finance.

The establishment of the China (Shanghai) Pilot Free Trade Zone (FTZ) will bring more business for cross--border trade and capital flow, PwC said.

Many banks have already opened new branches in the Shanghai FTZ.

HSBC said in an e-mail sent to the Global Times on December 31 that it had gained regulatory approval to open a branch in the Shanghai FTZ, and Bank of East Asia opened a branch in the FTZ on January 7.

Foreign banks are also poised to develop more fee-based services, particularly in the wealth management area, despite facing strong competition from domestic lenders, PwC said.

Unlike China's wealth management products, which are usually connected to so-called shadow banking activities, foreign banks' wealth management products are often pegged with foreign exchange and derivatives products, which have market risks, Yung said.

Over the past few years, China's wealth management products have grown smoothly and quickly, with few or no defaults, and this gives -Chinese banks an advantage over foreign banks in selling wealth management -products, Yung told the Global Times on Tuesday.

"But it doesn't mean that the default risk of Chinese banks' wealth management products is low," he said.

China's State Council has drafted new rules to strengthen supervision of the rapidly growing shadow banking industry, media reports said on -January 6.

Foreign banks have more mature risk control ability than their Chinese peers, and making the business environment more properly regulated can provide a level playing field for all banks in China, said Ma Yingni, a financial services partner with PwC.

In previous years, government policies were more favorable to domestic Chinese banks than to foreign ones, which is why foreign banks' market share is only about 2 percent in terms of banking assets, said Jimmy Leung, banking and capital markets leader at PwC China.

The profitability of foreign banks in China in 2013 was the same as in 2012, and they all believe the 2 percent market share will not change any time soon, Leung said.

There are still many rules and regulations, as well as the continuing capital and liquidity constraints, which pose obstacles for foreign banks.

Foreign banks hope to see a revision of regulations in areas "such as the fo-reign debt quota and the loan to deposit ratio," Ernst & Young said in a note sent to the Global Times on January 6.