Financial analysts who claim that Chinas big banks
will soon catch up with their Western counterparts in the
league tables demonstrate a lack of understanding about what it
takes to be a world-class player in this industry. Goldman,
Sachs & Co. became a powerhouse by developing its culture,
talent pool and infrastructure over the past century under the
right mix of regulation and opportunity. For Chinese banks to
reach the same competitive plane would likewise take decades,
if they could manage it at all.
First and foremost among the issues Chinese banks face is
compensation. Wall Street, with its extraordinarily large
compensation packages, is able to lure the best talent in the
U.S. A 23-year-old who can earn $3 million a year speculating
in the markets has little incentive to go into other
industries. In China the government owns large equity stakes in
the banks, which it views not as profit centers but as
tools to carry out certain mandates. As a result, these banks
would be hardpressed to offer the type of compensation that
would attract and retain the best talent.
A second obstacle is the wild card of government
intervention, as seen in the Rio Tinto scandal. Potential
clients may well conclude that doing business with purely
private enterprises is a safer, smoother route.
A third stumbling block is the relative lack of financial
sophistication in China. The country has no derivatives market
and an extremely small bond market, does not allow shorting and
has virtually no consumer credit outside of mortgages.
Financial services in China look like those in the U.S. in the
1970s. Building an industry with the necessary risk management
and intellectual capital to rival New York or London will take
Last, the cultural gap between U.S. and Chinese financial
firms is enormous. Goldman Sachs and other large Western firms
originated as partnerships, an ownership structure that
instills a culture of care and commitment in employees. Many
Chinese banks, especially the largest ones, have evolved under
state ownership. Their employees, therefore, do not feel the
same loyalty as their counterparts at Western investment banks
and have less incentive to be innovative and competitive.
If the Chinese government wants to build the countrys
financial sector, it will have to liberalize the currency,
establish consumer credit and allow much freer capital markets.
It must permit more generous compensation packages to attract
top talent from Western firms and among Chinese graduates, and
it will have to reduce its involvement in the industry, giving
employees a greater ownership stake in the firms. Doing all of
this is a tall order, and after witnessing the credit crisis
topple some Western firms, the Chinese are in no hurry to
follow in their footsteps.
That said, now that large Western banks such as Goldman
Sachs have become public companies, abandoning the partnership
model together with other elements of the culture that made
them successful, some argue that the playing field may begin to
level. If so, Chinese banks may eventually be able to catch up
and develop formidable franchises. To do this they must develop
greater trust between management and employees, rewarding the
latter for their efforts, giving them greater autonomy to take
calculated risks to benefit the firm and encouraging them to
believe that they belong to an exclusive club that deserves
Unfortunately, creating such a culture is easier said than
done, especially in a country where parents learned to mistrust
their own children only a few short decades ago during the
Cultural Revolution. However, only when this challenge is
overcome can Chinese banks successfully retain the necessary
intellectual capital and talent to compete against the best
deal makers in the world.
Lee is an adjunct professor at New York
University, a former visiting professor at Peking University,
an investment banker and a fixed-income trader.
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