Banking on change

Now that China is a member of the WTO, local and foreign banks are flexing their competitive muscles.

Now that China is a member of the WTO, local and foreign banks are flexing their competitive muscles.

By Kazuhiko Shimizu
February 2002
Institutional Investor Magazine

Speaking to a roomful of foreign bankers in September at Shanghai’s modern Pudong Shangri-La Hotel overlooking the murky Huangpu River, China Construction Bank executive Kong Yongxin sounded less like a banker than an official of the Foreign Ministry. “I am personally convinced that the further opening up of China’s banking market to foreign banks after China’s entry into the WTO should be viewed as a partnership rather than a competition,” Kong told the audience in his impeccable, Chinese-accented English.

Kong, general manager of China Construction’s two-year-old financial institutions group, had good reason to be diplomatic: he was addressing prospective customers who are also competitors. Thanks to China’s formal acceptance into the World Trade Organization on December 11, such aggressive institutions as Bank of East Asia, Citibank, HSBC Holdings and Standard Chartered Bank have gained entry to a hugely promising market that boasts nearly $1 trillion in household savings - already the second largest in Asia behind Japan - and is growing at a double-digit clip. With seasoned management, healthier balance sheets and more advanced technology, these formidable global powers are eager to take on sprawling banks like Kong’s, the country’s third biggest, with 2.532 trillion renminbi ($308.7 billion) in assets. And China’s four dominant state-owned banks - Agricultural Bank of China, Bank of China, China Construction and Industrial & Commercial Bank of China - hardly seem able to fend off the interlopers.

Since being spun out of the People’s Bank of China, the central bank, in the late 1970s and early 1980s, the four have been models of bureaucratic ineptitude, with bloated staffs, poor earnings, sour balance sheets and overmatched managements. Roughly half of the country’s R11.3 trillion in outstanding loans is thought to be nonperforming; as much as 80 percent of that total is deemed irrecoverable. In contrast, the average NPL ratio at U.S. banks is below 1 percent, and elsewhere in Asia NPLs of 15 percent are the norm (not including debt-choked Japan, where the NPL level has soared above 30 percent).

And the banks are models of inefficiency. ICBC alone boasted a 1998 payroll (since reduced) of roughly 570,000 employees. By comparison, Citigroup, whose $902 billion in assets are nearly double those of ICBC, operates worldwide with a staff of 233,000. While ICBC reported net income of R5.09 billion ($621 million) in 2000, Citigroup earned $13.52 billion.

Tracy Yu, head of banking research for Hong Kong and China at UBS Warburg Asia, notes that the state-owned banks are weighed down by a cost-to-income ratio averaging 85 percent, among the highest in the world. That means that Chinese banks spend R85 to generate R100 in revenue. The average elsewhere in Asia is 35 to 40 percent. “Put simply, banks with such high cost-to-income ratios not only suffer poor profitability, but they also lack the ability to generate enough capital to support loan and asset growth,” says Yu.

So why is Kong, representing a bank where 32 percent of all loans are nonperforming, openly cultivating foreigners who no doubt covet a slice of China Construction’s 18 percent deposit share? And why are those competitors listening to his pitch? Simple: He is selling local payments and draft-clearing services that the newcomers need to operate in the country. He has already signed HSBC as a client, and he’s after more. “The growth of foreign banks’ business in China would mean an increase in our bank’s financial institution customers,” says the confident executive.

Kong’s opportunistic approach is new to a market that has historically been closed and protectionist. It heralds a major cultural shift that is helping to reinvigorate old warhorses like China Construction, which, like other state-run banks, had paid little attention to such basics as marketing, risk management or even profitability. To be sure, Kong and his confederates have little choice; in the coming months they will be competing not only against the newly empowered foreigners but a dynamic new generation of shareholder-owned institutions, like China Everbright Bank (see box) and China Merchants Bank, that has risen up over the past decade or so.

The competition is heating up as the state banks try to get in shape for the fight. They have cut hundreds of thousands of staff who could once count on lifetime employment. The banks have tried to hone their strategic advantages, jettisoning unproductive branches and introducing modern, more customer-friendly services such as Internet and telephone banking and weekend hours. Meanwhile, some of the smaller private institutions have even dared to poach staff from their foreign rivals by offering six-figure compensation packages - previously unheard of in a country where the average annual income is still about $850 - and there’s talk of offering stock options.

With WTO membership now a reality, the Chinese don’t have a lot of time to prepare. For now, foreign competitors’ operations are mainly limited to providing foreign currency services to non-Chinese companies and joint ventures. Within Shenzhen and Shanghai the banks can sell local currency services to foreign customers. But in five years overseas banks will be able to offer a full array of banking services - in any currency - to retail and wholesale customers throughout the country. Banks like HSBC and Citibank will gradually be permitted to offer renminbi-based services, first to Chinese companies and then to individuals in more and more cities. By 2007, just before another competition in China, the 2008 Olympics, gets under way, the international banks and local institutions will be free to vie with one another without limitation.

“We will obviously bring some competition, some new products,” says Richard Stanley, the Shanghai-based head of Citibank’s China operations. “We will put some pressure on local banks to improve their services.”

But new rights notwithstanding, the foreign banks face a tough battle of their own. Not least are regulatory uncertainties: Though Beijing’s initial directives seem clear enough, the government hasn’t laid out a complete plan for the development of the banking business and is still working on some of the ground rules. As it stands now, the overseas banks must apply to the government for permission to open each new branch - a process that can take months, if not years - and they can have only one branch in each city.

Qun Liao, a senior economist at Standard Chartered who has done extensive studies of China’s banking system and the WTO, sees continuing constraints on the evolution of Chinese banking even as deregulation takes hold. “Foreign banks will face a lot of restrictions and a lot of problems even five years after China’s entry into the WTO,” he predicts.

Who’ll win this contest? Most observers expect that the state-run giants will remain bogged down by their balance-sheet woes, surrendering at least some portion of their 70 percent stranglehold on deposits to the foreign banks, which will primarily target small groups of relatively high-net-worth individuals. The smaller Chinese shareholder-owned institutions are likely to gain ground too, mainly serving upper-middle-class consumers and private corporations. Leaner and more market focused, these smaller outfits, such as China Everbright, China Merchants, China Minsheng Banking Corp. and Citic Industrial Bank, don’t carry heavy burdens from past lending to loss-making state-owned companies. They also have more extensive branch networks than the foreign banks. “The ten nationwide shareholding banks could easily double their current 10 percent market share in the next five years because the four state-owned banks and foreign banks are not in a position to compete with them,” says UBS Warburg’s Yu.

To be sure, even these local institutions could lose ground at first, until they learn how to compete with the newcomers on an even footing. That’s what happened in China’s recently deregulated insurance market. Once foreigners were allowed in, American International Group quickly grabbed a 20 percent market share in Shanghai. But Pin An Insurance Co., an energetic local outfit, quickly copied many of AIG’s practices and cut into its share (Institutional Investor, June 2000).

No one doubts that there are big changes in store for a banking system that is so heavily dominated by the four big government-owned banks; they control not only 70 percent of deposits but 80 percent of loans. With an additional 10 percent of deposits and loans in the hands of the shareholder-owned banks - which include government entities among their shareholders - the rest of the market is highly fragmented among three policy banks, 100 city commercial banks, 836 cooperatives (which were consolidated from more than 800 urban cooperatives and 41,000 rural cooperatives) and the foreign banking contingent. The latter - 177 banks with 155 branches and 429 representative offices - holds a mere 1.5 percent of Chinese assets, 2 percent of loans and 1 percent of deposits.

All these entities compete in a narrow range of activities; banks are not now allowed to sell insurance or deal in stocks and bonds, as they can in many Western countries’ universal banking systems. And the Chinese government may be cautious about deregulating along such lines for fear that foreign entrants would have a competitive advantage over domestic banks. “I do not think the Chinese government will allow [universal banking],” says Kiyoshige Akamatsu, executive officer and general manager of Industrial Bank of Japan’s Shanghai branch.

Still, predicts Chen Xingdon, the Beijing-based China economist and executive director of BNP Paribas Peregrine Securities: “In the next five years, there will be tremendous restructuring and reorganization and changes in the Chinese banking and financial sector. All Chinese and foreign banks will be competing on an equal footing. Within ten years, the Chinese banking industry will be just like any other industrialized country’s banking industry in terms of operations.”

For the big state-owned banks, the influx of competition presents an opportunity to become world-class competitors. Jiang Jianqing, chairman and president of ICBC, says that the bank is making a concerted effort to conform to global banking practices. “We will meet international standards in terms of accounting, balance sheets and quality of service in the next five years and make up the difference between our bank and international banks in the next five years,” declares the former central banker and Bank of Shanghai executive who took the helm at ICBC two years ago. “We will become like an HSBC or Citigroup. We are confident that we can achieve this.”

He is taking tough measures to get there. The biggest Asian financial institution outside Japan in terms of assets, ICBC has slashed its staff of 570,000 by 130,000 since 1998 and plans to shed an additional 140,000 workers in the next five years. It has pared its branches from 40,000 to 31,000, with an eventual target of 25,000. Like most of its competitors’ branches, ICBC’s are now open 365 days a year: Until two years ago they were closed two days per week. And within the past two years, the bank has rolled out ATMs in virtually all its locations.

ICBC and the other big banks are also attempting to broaden their product offerings. Since the government introduced a series of housing reforms in 1998, banks have jumped into mortgage lending. Home loan volume has grown by 200 percent annually in the past three years; the R337.7 billion originated in 2000 accounted for 40 percent of all new loans that year. Virtually nonexistent several years ago, China Construction’s mortgage holdings now account for 9 percent of its R1.4 trillion loan portfolio.

All of China’s banks are looking for ways to improve service to win and retain customers. Banking services via the Internet or phone are now widely available, and mobile phone connections are increasingly prevalent. Since launching an Internet banking service in August 1999, China Construction has signed more than 11,000 users. In September Agricultural Bank of China opened 100 financial supermarkets that provide a full range of services, including consumer loans, safe-deposit boxes, notary and insurance, in 100 cities. These services are offered by polite and solicitous staff in a country where bank employees were once notoriously surly.

Although Jiang concedes that getting nearly a half million employees to understand, let alone implement, a service-based strategy is his most difficult task, the sheer size of banks such as ICBC and China Construction makes broad-based competition virtually impossible for foreigners. The largest foreign institution, HSBC, has just ten branches, mostly in the major coastal cities. By contrast, China Construction has 25,763 branches and other outlets, reaching from Tibet all the way to northeastern Heilongjiang.

With the government’s help, the state-owned banks are also starting to clean up their balance sheets. The Ministry of Finance recapitalized the big four via a R270 billion bond issue in 1998. In 1999 the banks set up asset management companies to off-load their nonperforming loans, and by the end of 2000, they had transferred R1.3 trillion of NPLs into them. In November the asset managers began auctioning the deeply discounted loans to foreign and domestic buyers. By getting these loans off its balance sheet, Bank of China has been able to cut its NPL ratio (it is currently the only one using the same measurement standards as those of European and U.S. institutions) to 29 percent from 38 percent, in preparation for a share listing for its Hong Kong unit sometime this year. The other state-owned lenders are trying gamely to follow BoC’s path.

Some of the state banks’ problems, however, won’t be as easy to dispose of as a pile of bad loans. Nicholas Lardy, an expert on Chinese banking and economy at the Brookings Institution in Washington, D.C., says the big banks are merely replacing the old bad loans with new ones. About 80 percent of the biggest banks’ credits still go to state-owned enterprises, themselves relics of the Communist Party’s centralized planning that once employed nearly two thirds of China’s workers. Too often, these unprofitable operations rely on the loans to stay solvent; local government officials, sensitive to workers’ needs, continue to push the banks to make new funds available. Senior government officials in Beijing, says Lardy, would be hard-pressed to slow the flow of money to these entities since so much of the lending takes place in China’s vast countryside, where local officials hold sway.

Another problem is corruption. In one prominent case in 1999, the former head of China Construction’s Guangdong province branch, Dong Huchen, was jailed for 13 years for accepting $40,000 in bribes to approve loans worth $14 million. Last September China’s central bank disciplined more than 1,200 officials at the four state banks for exceeding limits on nonperforming loans. And in mid-January China Construction dismissed its president and CEO, Wang Xuebing, amid allegations of lending violations at Bank of China, where Wang was president until two years ago.

The bad loans place big strains on the state banks. Despite its government recapitalization and the creation of an asset management company for bad credits, ICBC’s Jiang disclosed to Institutional Investor that his bank’s NPL ratio was still a sickly 42 percent at the end of 1999. It hasn’t compiled more recent annual figures.

The biggest banks are also battling their past. They have little experience operating as independent entities and none in coping with a highly competitive marketplace. For much of its modern history, the People’s Bank of China functioned as both the central bank and the country’s only retail bank. In 1978 reform-minded paramount leader Deng Xiaoping started the long march toward a market-based banking system. The central bank spun off several of its departments to create the four state-owned banks: In 1979 Agricultural Bank of China was created for farm lending, and Bank of China was spun out of PBoC’s foreign trade division to handle foreign exchange business. Five years later ICBC was created to take over commercial lending, and China Construction came into being to manage project finance and construction. Although separated from the central bank, the four institutions continued to function as outlets for government financing of the state sector. And their employees not only had jobs for life but received medical care, education, housing and social security benefits.

Compared to the big state institutions, the ten privately owned commercial banks are paragons of modern banking. Fifteen-year-old China Merchants made a handsome R1.669 billion profit before taxes in 2000 with a relatively decent NPL ratio of 11 percent. With a return on equity of 8.2 percent - about half the average for big U.S. banks - China Merchants is regarded as one of the best-run banks in China, and it is eager to grow. “Our bank accounts for 4 percent of the market in terms of number of staff, 2 percent in terms of branches and 1.6 percent in terms of total assets, but our profit accounts for 6 percent,” boasts Ma Weihua, president and CEO.

When the bank opened in Shenzhen in 1987, it had R100 million in capital, one office and 36 employees. Today it has R4.4 billion in capital, 250 branches and 7,000 employees. From its founding, its assets grew more than 2,000-fold, to R214.4 billion at the end of 2000, and it plans to open representative offices in Hong Kong and New York.

One key to the bank’s rapid growth has been its willingness to invest heavily in technology. Its bank card operation, known as yiketong (all-in-one card), was launched in 1995 and is now one of the country’s most popular, with 14 million cardholders. The card enables clients to check their deposit balances, transfer funds, get loans, pay bills, change currency or trade stock online. China Merchants, which applied in September to the China Securities Regulatory Commission for permission to list on the Shanghai Stock Exchange, now has about 200,000 corporate Internet banking customers.

Though his bank has thrived under the current system, China Merchants’ Ma welcomes the coming reforms. They will allow his bank by 2007 to compete in areas currently restricted to state banks, such as mortgage lending and open-ended investment funds. “There are more opportunities than challenges after China’s entry into the WTO, because it will become a more fair and open banking market. There is so much business that is open only to state-owned banks. Our hands and feet are bound,” Ma says. Recently, he notes, a major state-owned client closed its accounts because its management, apparently at government insistence, had to shift its deposits to state-run ICBC.

Similar episodes abound, says Ma. When the first open-ended equity funds were created in September (Institutional Investor, October 2001), the government allowed only the state banks to act as custodians. “There are so many examples like this that only state-run banks are allowed to do,” says Ma, who left a job at the central bank to take up his current position in January 1999. “Our immediate competitors are not foreign banks but the privileged, state-owned banks.”

Still, Ma and other private sector bank presidents have taken care to protect their interests - and their employees - from the foreign institutions. Recognizing that they could lose their best people to foreign banks offering higher salaries, they’ve gone on the offensive. China Everbright Bank has recruited people away from Citibank, HSBC and Standard Chartered, for example. “We are willing to pay as much as foreign banks or even more. We want to attract capable staff from foreign banks, other shareholding banks and even from state-owned banks,” says Chen Yuansheng, Everbright’s assistant president, who claims his bank will pay as much as R1 million a year.

Most prized are technology, foreign exchange and management specialists, who can command not only six-figure pay packages but housing and car loans as well. China Minsheng, which has floated about 25 percent of its shares on the Shanghai A-share market, has even applied to the CSRC for permission to introduce stock options for staff, previously forbidden because they were unregulated or not part of the tax code. “Our bank shareholders [the remainder of the bank is owned by 49 Chinese companies] are all private sector investors. This enables us to determine our staff salaries based on performance and ability and to offer very competitive salaries according to competitive market prices,” says Hong Qi, China Minsheng’s executive vice president.

At the same time, China Everbright is retraining existing staff and, through cooperative programs, sending them to work and study at HSBC, Standard Chartered, Bank of East Asia and other banks in Hong Kong. Promising young trainees have been sent off to earn MBA degrees in the U.S. and U.K. “This is an important step to prepare for the WTO era,” says Everbright’s Chen.

The foreign banks will have to find their running room between the vast state banks and the feisty shareholder-owned banks. Most don’t plan to market themselves heavily to Chinese corporate borrowers, many of which are loath to provide even basic financial information. Instead, they will target foreign nationals, joint ventures and wealthier Chinese who utilize foreign currencies. “There are at least 2 million foreign nationals and more than 400,000 foreign joint ventures in China,” says Raymond Yu, head of the China division at Bank of East Asia, which pioneered lending to foreigners, including overseas Chinese populations.

With programs to lend to foreigners already under way, Yu and his counterparts at Citibank, HSBC and Standard Chartered all say they will this year target upper-middle-class Chinese customers, who live mainly in the relatively affluent coastal regions, for foreign currency accounts. “We cannot compete with the four state-owned banks, which have more than 140,000 branches. We have to be selective. We will target high-net-worth individuals,” said Stanley Wong, chief executive of Standard Chartered’s China operations. HSBC’s brokerage affiliate, HSBC Securities Asia, estimates that 67.7 million people in 16 major cities have average annual household incomes of $2,450. Bank of East Asia has retooled its computer systems and readied foreign currency savings passbooks to begin selling to locals once the government clarifies its rules.

In going after domestic customers with foreign currency needs, the banks acknowledge that they’re aiming at just a tiny part of China’s retail banking market. Foreign currency deposits amount to only $79.4 billion, or less than 10 percent of the R7.1 trillion in local currency savings of Chinese residents. And there isn’t a huge prospect for growth because China still imposes strict limits on the amount of foreign currency its citizens can obtain.

Branching presents another difficulty. Each foreign bank can open no more than one branch in each of 24 government-approved cities. PBoC requires foreign banks to have had a representative office in operation for more than two years in the city before it can open a full-service branch, and the bank’s total global assets must exceed $20 billion. As Standard Chartered’s Wong notes, “Citibank has five branches, HSBC has ten, and we have seven,” making any full-scale sales operation impossible. Even so, Wong projects that foreign banks will snag nearly 10 percent of China’s banking marketplace within the next decade.

With its lingering restrictions on foreign currency ownership and bank branching, Beijing continues to operate as the invisible hand of the Chinese markets. At present, only 32 foreign banks are allowed to do any type of local currency business. Even now, a requirement that foreign banks limit renminbi-denominated lending to 50 percent of their total foreign currency liability - a rule expected to stay in place for at least five years - means the foreign banks can’t service the needs of their multinational clients, says Yu of Bank of East Asia, which has been operating in China since it opened in Shanghai in 1920.

Despite the limitations, Western banks have reason to believe that they can create a significant business once they are allowed to conduct local currency business with Chinese depositors. The foreigners won’t necessarily need huge market shares to thrive. A number of bankers point to Citibank’s success in Taiwan as a precedent: Citibank’s Taiwanese operation reported 8.291 billion Taiwan dollars ($240 million) net pretax profit last year, while sporting a 1 percent loan market share and 1.3 percent deposit share. Says one admiring competitor: “They have a beautiful machine in Taiwan. They know their customers. They have done it, and they know what it takes. All they have to do is to move the machine to China.”

Citibank targeted high-net-worth Taiwanese with such products as credit cards, personal loans and investment funds. The bank emphasized profitability, not market share. And given the mainland’s 1.3 billion population - versus just 22 million in Taiwan - Citibank has no desire to change that strategy. Citibank’s Stanley says foreign banks will be hard-pressed to gain a 10 percent share of China’s banking market in the next ten years. “I do not think we will hurt anybody, because the market is too big and local banks are doing what they have to do to improve.”

There are indications that Chinese customers will welcome new products - regardless of who offers them. In a McKinsey & Co. survey of 433 middle- and high-income urban customers with annual household incomes of $4,350 and above, 44 percent said they believed that the entry of foreign banks would benefit them personally. The study also found that Chinese customers tend to shop around for good deals: 27 percent had opened a new bank account in the past year, more than twice the average percentage of Asian customers overall. They are also willing to pay for financial advice: 36 percent said they would pay for such services, whereas positive response rates in places like Hong Kong and Taiwan were in single digits.

Of course, one way to reach this audience would simply be to buy a bigger presence, as major foreign banks have done in Japan and elsewhere in Asia. But that seems unlikely to occur. Although the central government approved the sale of minority stakes in preparation for WTO acceptance, major banks haven’t leaped at the chance. Last July shareholder-owned Bank of Communications, the country’s fifth-biggest institution, said it would like two or three foreign banks to buy up to a 15 percent stake. Although Citibank, HSBC and Standard Chartered all showed some interest, none has stepped up to the plate yet.

Most observers expect the foreigners to move very deliberately in the acquisition game. “The approach that I would expect us to take is not to invest money where you cannot get control,” says Michiel van Schaardenburg, ABN Amro Bank’s top executive in China. The head of a Western investment bank in Beijing agrees: “There is no merit for foreign financial institutions to buy stakes in the Bank of Communications except for its huge networks. How do you check its nonperforming loans? How can you enforce Western-style disclosure?”

In one sign of movement, HSBC announced in late December that it had agreed to pay $62.6 million for an 8 percent stake in Bank of Shanghai, thus becoming the first foreign commercial bank to buy into a mainland bank. (International Finance Corp., the World Bank’s private investment arm, already owns a 5 percent stake in the city bank, while Hong Kong-based Commercial Bank of Shanghai has said it will take a 3 percent stake.)

Created in 1995 by a merger of urban credit cooperatives, Bank of Shanghai is owned by the municipal government and is one of China’s smallest city banks, with 196 branches in Shanghai and total assets of R96.3 billion. Its customers are mainly private businesses, and it has a low level of nonperforming loans compared with the four big state-owned banks.

Some foreign bankers and banking analysts question the business sense of buying a minor stake in one of China’s smaller local-government-owned banks - and one which lacks a nationwide branch network. But others think the deal may win HSBC some important political capital. “What does HSBC get out of taking a minor stake? It shows HSBC’s strong relationship with China and commitment to the Chinese market,” says a foreign banker based in Shanghai.

“Bank of Shanghai has a wealth of knowledge about China’s domestic banking sector,” sums up David Eldon, chairman of HSBC Asia Pacific.

HSBC is looking to the future, to the day when China’s financial markets truly duplicate those of developed economies. Only then will banks be able to pursue asset management, banking, insurance and securities brokerage under one brand name anywhere in China. But that’s not likely to happen soon, given that the country has only separated its banking, insurance and securities regulatory bodies in the past few years.

“We are studying universal banking or a financial holding system for the future, but we are very unlikely to introduce it at least for the next five years after China enters the WTO,” a senior central bank official says.

“When the gate opens to that business, we want to be at the front of the queue,” says Eldon.

Citigroup in waiting

China may be opening up its banking system, thanks to its official entry into the World Trade Organization in December, but the country has not yet embraced the universal banking model, prevalent elsewhere in the world, that permits financial institutions wide latitude in the services they provide, from basic banking to money management to securities trading. When it does, one local institution, China Everbright Bank, will have a significant head start.

Based in Beijing, China’s eighth-biggest bank, with 207.4 billion renminbi ($25.3 billion) in assets, differs from most of its peers in that it has ready-made insurance and securities affiliates to call on. As part of China Everbright Group, the bank is connected to the country’s tenth-largest brokerage, Everbright Securities Co., and a joint venture insurer, Sun Life Everbright Life Co., which it operates in conjunction with Sun Life Assurance Co. of Canada. The parent, which at least on paper resembles the financial holding companies prevalent in the U.S. and Europe, also holds minority stakes in China’s second-biggest brokerage, Shenyin & Wanguo Securities Co., and in two of the country’s largest fund management companies, Boshi Fund Management Co. and Dacheng Fund Management Co.

China Everbright also has a strong government tie: The state council, China’s closest equivalent to a cabinet, owns 100 percent of the holding company, which until 1997 was an unwieldy conglomerate with interests in everything from restaurants to retailing to banking. Between 1997 and 1999 China Everbright’s management restructured the group to focus on financial services. When the banking subsidiary went public in 1997, the group retained a controlling interest, while the Asian Development Bank bought 3 percent and more than 130 other Chinese companies purchased the rest.

Beijing has closely scrutinized how Taiwan opened its capital markets to foreigners last year, leading many observers to believe that the mainland government will eventually adopt the island nation’s universal model. That’s unlikely to occur for several years, however. First, the government wants to monitor the substantial changes already under way in the banking system and put the proper risk protections in place.

In the meantime, Chen Yuansheng, China Everbright’s assistant president, can only grit his teeth over the missed opportunities: “We are not allowed to do any cross-selling in China among our group companies. We do not have any synergy among the group. This is the biggest problem for us.”

The government is reluctant to introduce universal banking too rapidly for fear that foreign financial groups, with their expertise in many markets, would quickly dominate China’s fledgling financial services market.

Everbright’s Chen remains hopeful, though he concedes that universal banking is at least five years away. Once cross-selling is permitted, he says, China Everbright Group will be ready to offer not only loans to Chinese companies, but also help with capital market financing and advice on investments.

In 1997 China Everbright was the first company permitted to offer a foreign institution a minority stake, and Chen is betting that the government will choose his bank as a test case of one-stop financial shopping. “I hope we will be allowed to do universal banking. We hope to be the first one to do it,” says Chen.