ANZ banks on a big opportunity in China

Foreign banks only comprise 2 per cent of total market share in China, but financial sector reform is likely to open up more opportunities to fund cross-border investment and trade flows.

The Chinese financial services industry is one of the least open sectors in the country: foreign banks account for about 2 per cent of total market share. But it is a huge market, with 1.3 billion customers and trillions of dollars in savings and assets that no bank can afford to ignore.

Australia and New Zealand Banking Group has been in China since 1987 and sees the country as an integral part of the bank’s supra-regional strategy. Its chief executive Mike Smith talks about China at every opportunity. China Spectator recently interviewed the bank’s outgoing China chief executive Charles Li, who will leave the bank today after three years of service.

Li says ANZ has already moved beyond being a bank that facilitates trade and investment between Asia, Australia and New Zealand. It is becoming an increasingly important player in intra-regional trade and investment flows, which includes helping Chinese companies invest or trade with Indonesians, or Singaporeans businesses doing deals in Jakarta.

"Over times, investors and analysts will have a better appreciation of ANZ’s supra-regional strategy as we grow our business in the Asia Pacific region," he says. China is expected to be a linchpin in this strategy as the world’s largest trading country and an increasingly important player in foreign investment.

“As a regional bank, we have not only intimate knowledge of home markets like Australia and New Zealand but also countries around the region. For example, Chinese companies are interested in fisheries and natural resources in the Pacific Island countries, tin mines in Indonesia, infrastructure projects in Laos and Cambodia,” he says.

“Chinese companies are not only building infrastructure but also selling capital equipment like electricity generators. We can get involved in many aspects of their transactions.” 

Though the bank does not break down its revenue at a country level, Li says China is by far the largest referrer of businesses to other branches in the region and accounts for half of all referral businesses.  

Despite recent slumps in commodity prices, Li is still reasonably optimistic about the future demand for Australian resources. “I believe China’s urbanisation will continue to drive demand for resources. The commodity price was artificially high before on the back of China’s four trillion yuan stimulus package,” he says.

China’s steel industry, which accounts more than half of the world’s total production, is the largest buyer of Australian iron ore. But the industry has been dogged by excess capacity, low-grade production and environmental pollution. 

Li points out there are a mismatch between supply and demand. On one hand, Chinese steel mills are producing a lot of low-grade steel and iron, which causes pollution and overcapacity. However, there is a shortage of supply of high quality steel that is needed for sectors such as manufacturing.

“The Chinese steel industry needs to undergo significant restructuring,” he says. “China still needs high-grade steel for building high-speed railways and expressways. I think China will still rely on Australia to supply high-quality iron ore. I am quite positive about this,” he says.

Small and medium-sized Chinese companies struggle to get credit in China and some of them are paying as much as 30 per cent interest on their loans. China Spectator asked Li whether he sees this area as a potential opportunity for foreign banks like ANZ.

He explains this problem is due to deep structural issues in the Chinese financial system. People are willing to lend to state-owned enterprises because there is an assumption that the state would clean up the mess if there are problems.

“Foreign banks only account for 2 per cent of total assets in China. I think it is unrealistic to expect foreign banks to fill that funding gap. Our core competitiveness lies in cross-border investment and trade flows. If state-owned banks don’t change their risk assessment strategy, it is hard to solve the problem of funding private enterprises in China,” he says.

One of the highlights of the comprehensive reform package introduced by the new Chinese administration under Xi Jinping is financial sector reform. The Chinese central bank promises to liberalise the interest rate within two years, which has been tightly controlled. Beijing is also gradually opening up the sector to private firms.

“Financial sector reform is not going to happen overnight and I think it will take a long time for that to happen,” he says, “We can already see some changes such as private capital in banking sector, partial liberalisation of interest rate and internationalisation of the renminbi. I think there is likely to be a qualitative change within next three to five years.” 

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