1 April 2003
Banking On Greater Demand From The PRD(HKTDC Hong Kong Trade Services, Vol 01,2003)
Vol 1, 2003
Banking, Finance & Insurance
|Name your currency: at least 13 foreign banks have been granted permission to provide foreign currency-related services to local companies and individuals on the mainland|
The increasing economic integration between Hong Kong and the neighbouring Pearl River Delta (PRD) region suggests there will be increasing demand for financial services provided by foreign banks operating in the Delta.
In fact, Hong Kong provided a major source of foreign direct investment to Guangdong over the 1979-2001 period, accounting for 81% of the total utilised value and 90% of the total number of projects, with Hong Kong businesses investing some US$94bn in 217,000 ventures.
According to a survey recently commissioned by the Federation of Hong Kong Industries, there are 11 million workers currently employed by Hong Kong-registered companies on the Chinese mainland.
The survey reported that more than half of the manufacturing and trading companies registered in Hong Kong, comprising a total of 63,000 companies, were "economically active" on the mainland.
Out of an estimated 59,000 factories on the mainland that serve Hong Kong companies, 53,000 are concentrated in the PRD region. According to Hong Kong SAR government statistics, there are some 300,000 SMEs in Hong Kong that have a business presence on the mainland, especially in the PRD region.
Many SMEs in Hong Kong have set up or maintained control over their production operations on the mainland in the form of foreign-invested enterprises (FIEs), including Sino-foreign Equity Joint Venture Enterprises, Contractual Joint Venture Enterprises and Wholly Foreign-owned Enterprises.
These enterprises may approach a foreign bank on the mainland for their banking needs. Before the mainland's entry into the World Trade Organization (WTO) in December 2001, provision of banking and financial services to these enterprises by foreign banks was subject to a number of regulatory banking restrictions.
Although some restrictions still exist, the gradual opening of the mainland financial sector following WTO membership has generated more opportunities for foreign banks to serve local and foreign businesses on the mainland, offering them a comprehensive range of services.
There are now more than 40 foreign bank branches operating in the PRD region (mainly Shenzhen, Zhuhai and Guangzhou), and the number is expected to rise steadily over time as more banking licences are issued by mainland authorities.
Continuous expansion of the mainland banking sector has led to increasing business opportunities for foreign banks in serving both local and foreign clients located on the mainland.
Foreign currency services
Foreign banks have been able to provide foreign currency services such as trade and project financing and deposit taking to foreign clients (companies and individuals) for some time. Starting from January 1, 2002 foreign banks have also been allowed to provide foreign currency-related services to local companies and individuals on the mainland without geographical restric-tions. At least 13 foreign banks have been granted permission to offer such services.
Foreign banks have provided renminbi (RMB) services to foreign clients in Shanghai and Shenzhen since 1997 and, following the mainland's WTO accession, these services were extended to other areas including Tianjin, Dalian, Guangzhou, Qingdao, Nanjing, Wuhan and Zhuhai.
For instance, an FIE registered in Guangdong, Hunan or Guangxi may seek finance from a Shenzhen branch of a foreign bank with an RMB lending licence.
Development in the city of Zhuhai has progressed more quickly in parallel to other cities in the region, exceeding the original schedule to be completed in 2005.
In a few years' time, it is expected that foreign banks will also be able to provide RMB services for domestic companies and individuals in line with the mainland's schedule of opening specified in the WTO agreement. These developments will make it more flexible for FIEs to open RMB accounts with foreign banks.
Business scope for foreign banks has also been gradually expanding over time. For example, foreign banks can now provide offshore and Internet banking services subject to approval.
In future more business lines will be allowed, including car financing services (already opened to foreign non-bank financial institutions) and foreign currency credit cards.
Increasing cooperative partnerships
In order to better exploit business opportunities, foreign and domestic banks have started to establish strategic alliances or other forms of cooperation in recent years.
These include foreign acquisition of stakes in mainland local commercial banks. Partnerships such as these will enable the banks involved to provide a better and extended range of services to their clients.
Improving financial markets
In particular, gradual interest rate liberalisation will improve capital market conditions and facilitate lending to enterprises, especially SMEs due to increased flexibility in setting interest rates according to different levels of risk.
Increased integration between Hong Kong and the PRD region will generate greater demand for more varied financial services because Hong Kong companies are continuing to transfer from manufacturing to services and other areas, and more links to the PRD region are formed within their supply chains.
This will generate:
- more need for servicing cross-border transactions as well as companies' financing needs for business transactions conducted in the PRD region or Hong Kong
- demand for more varied services in addition to trade and project financing such as risk and asset management, payments and cash management, treasury, etc.
- more demand for provision of services locally in proximity to operations
in the PRD region, as companies increasingly localise their input sourcing,
sales and staff recruitment, and accumulate more local assets that are used
as collateral for lending.
In response, foreign banks have strengthened their capability within the PRD region to include an increasingly wide range of services covering:
- general working capital financing, eg working capital loans, term loans and bank guarantees
- factory or project financing, including equity and debt financing together with advisory services
- trade finance, including bill discounting, shipping guarantees and documentary credit advising
- export credits and export factoring
- deposit services for a wide range of currencies, including RMB in approved branches
- property finance to endusers in commercial or residential units
- credit cards
- electronic banking and ATM services.
The range of services is expected to grow steadily over time as the opening of the financial sector progresses and foreign banks' operations on the mainland increase.
With the expansion of the scope of banking services provided by foreign banks in the PRD region, Hong Kong companies (including SMEs) can now choose from a wide range of banking services to meet their operational needs.
Companies looking for banking services on the mainland should first approach their local bank in Hong Kong to find out if they offer these services. Their existing bankers are best able to advise which banking products and services are available on the mainland and are most suited to their business.
Nowadays, SMEs are able to access banking services offered by one bank on both sides of the border to help them manage their business. Regarding financing needs, banks are moving away from security lending and focusing on business viability as one of the criteria of credit assessment.
For example, HSBC offers Account Receivables Financing (ARF) - one type of unsecured lending - to SMEs in Hong Kong. Also called factoring, it provides convenient cash finance to SMEs by putting forward the quality receivable assets of the company as security.
It also helps address the problem of limited financial strength and inadequate financial reporting of the SME borrower. The intrinsic value of the account receivables basically enables lending banks to offer a more structured form of finance and at the same time provide cash flow support to SMEs.
This type of financing package not only addresses the working capital needs of many companies, but some lending institutions may also cater for the specific needs of those SMEs selling on open account terms - debtor credit risk management and ledger administration that facilitate internal operations.
After all, the key consideration of lenders is the seller's ability to deliver and the debtor's reliability - these determine the quality of the debt, and whether it may technically be assigned to a bank.
As for banking account services, some SME business owners find it inconvenient to visit the bank during normal business hours because they have to travel to the mainland frequently. HSBC offers both a Business Internet Banking service and a Phonebanking service, which allow SMEs to make banking transactions at any time.
Renminbi accounts can be opened at an HSBC branch on the mainland subject to the local regulations. Customers should contact their relationship managers in Hong Kong to make any arrangements.
With the increasing economic integration between Hong Kong and the PRD region, convenient banking services will be readily accessible wherever businesses are located in Hong Kong or on the mainland.
And customers, including SMEs, will be in a better position than ever before to experience one-stop banking service in the region.
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