1 April 2002
Getting It Right For Euroland (Banking, Finance & Insurance )(HKTDC Hong Kong Trade Services, Vol 01,2002)
Vol 1, 2002
BANKING, FINANCE & INSURANCE
|The euro symbol and the new currency's impact loom large over major markets in Europe.|
WITH euro notes and coins now packed into wallets across the 12-nation "Euroland", the euro has gained new reality for traders who had encountered the new currency only electronically.
Arguably, Asian enterprises had plenty of time to prepare for the euro's arrival in most of Europe's major markets. But small and medium enterprises trading with Europe may not have fully grasped all the implications from banking and business perspectives.
CEOs and finance directors must ensure their companies can transact in euros. Larger firms with treasury operations in Europe should consider new cash-management dimensions. All exporters or traders should consider how their markets may be changing internally and if the consequences affect their competitive balance versus suppliers elsewhere.
European companies can use the euro to transact cross-border business cheaper and more efficiently than using the previous 12 currencies. Gaining a taste for this, they naturally wish to extend such ease beyond Europe.
This has profound implications for Asia. As early as 1999, Deutsche Bank, Europe's largest bank by assets, noted that "a number of Europe's largest multinationals that source products in Asia have already said they will seek quotations from suppliers only in euros".
Any Hong Kong or Chinese mainland company hoping to trade extensively with Europe should have an account that can accept and make payments in euros. Doing so creates a significant advantage.
This is important even if other Asian companies neglect such advice. Germany's massive investments in the former Soviet Union and Turkey created a sort of Deutschmark zone that translated into readiness by suppliers there to do business in euros. Spain's ties with Latin America produce the same effect.
"With Hong Kong's dollar linked to the US currency, exposure in euros inevitably means foreign exchange risk and so companies may wish to consider some hedging strategies. They must also ensure their accounting systems are properly set up for payments, invoicing and accounting in euros," says Chekiang First Bank of Hong Kong's director Leo Kung.
For some trade operations, the euro creates the possibility of a single European treasury operation with the associated economies of scale.
"The euro has provided an opportunity to review and consolidate bank accounts across the euro zone, as well as to substantially improve liquidity management techniques. In addition, cross-border payments have become more seamless through the use of a number of different clearing systems which came into effect with the advent of the single currency," says Raymond Or, general manager of the HSBC Group in Hong Kong.
Hong Kong and Chinese mainland companies may need to review their marketing strategies. A single currency brings much greater price transparency to the euro zone.
At the wholesale level, such transparency may have prevailed for years. But with euro cash circulating and prices marked in euros, consumers in the 12 countries are keenly aware of price differentials. While they may not drive 100 kilometres across a border to buy eggs and carrots, they may for such consumer durables as DVD players or cars.
This means some price declines and stiff retail competition. The situation benefits larger groups able to squeeze suppliers, in part by reducing how many they use. Hong Kong and mainland SMEs must work hard at targeting large pan-European groups. If successful, they can maintain sales in traditional markets while opening up less usual ones like Portugal.
The big picture shows Asian manufacturers less able to maintain sales and margins by offering different prices to numerous customers in different countries.
Still, they must recognize that Europe's varied cultural and linguistic landscape prevents markets there from reaching the uniformity of the US. Different sales-tax rates alone mean euro retail prices will vary even if wholesale prices are identical.
In this scenario, buyers will welcome products with language- or culture-specific features to justify higher prices in different countries. Offering such products while providing services attuned to local needs is the best way to outpace most competitors.
WRITTEN BY NICHOLAS BRADBURY
|Non-mainland financial institutions are forbidden from domestic currency business until after three years (and two consecutive years of profitability).|
PROMINENT among the initial industries undergoing major reforms after the Chinese mainland's entry to the World Trade Organization is financial services.
Hong Kong financial-service providers say they are well placed to serve the expanding needs of international businesses on the mainland.
"We endeavour to provide quality services to meet customers' international business needs, especially in trade finance and letters of credit," says Salina Tong, head of corporate communications with The Bank of East Asia Ltd (BEA).
"We trust our services are well up to the standards and to the satisfaction of our customers. BEA provides a wide range of financial services to SMEs' operations on the mainland."
Hang Seng Bank has branches in Shanghai, Shenzhen, Guangzhou and Fuzhou, plus representative offices in Beijing and Xiamen. Its customers use services related to foreign-currency accounts, remittances, foreign exchange, loans and trade. Investment and financing advice is provided to SMEs, and the Shanghai branch has applied for a RMB licence.
Over the years, banks in Hong Kong have played a significant role in financing foreign investment on the mainland. Their affinity with the mainland market and corporate sector helps in introducing mainland entities to foreign investors seeking local partners.
SMEs may be attracted to services from Hong Kong banks due to strong reputations and perceived stability. Some customers are most at ease using overseas-savvy service providers to finance cross-border deals.
Hong Kong banks provide international-standard services, forcing domestic banks to compete at high levels.
Yet some restrictions do apply. Starting in January 2002, non-mainland financial institutions gained only somewhat limited access to the mainland's domestic commercial and private markets. Full access is promised by 2005.
Non-mainland financial institutions may hold minority stakes in the securities fund-management companies underwriting domestic equity issues or underwriting and trading in international equity and corporate or government debt issues. Initially, any non-mainland company's stake is limited to 33%. This can increase to 49% after January 1, 2003.
Non-mainland financial institutions may establish wholly owned bank subsidiaries or financial companies, or Sino-foreign joint-venture banks or finance companies, if the outside institution had US$10bn in total assets the previous year. Institutions showing assets of US$20bn may create overseas-bank branches.
Once active, non-mainland financial institutions are forbidden from domestic currency business until after three years (and two consecutive years of profitability).
Although non-mainland banks may conduct foreign-currency exchange business with overseas and domestic private or commercial clients, they are hobbled by the RMB's lack of full convertibility. International companies choose from a wider range of financial services these days, but they remain confined in repatriating RMB profits.
Officials in Beijing recently said Hong Kong-based banks may soon accept RMB deposits, which analysts regard as a step towards full convertibility.
Until 2005, RMB business by non-mainland banks is restricted to Shanghai, Shenzhen, Dalian and Tianjin. Eventually, all geographical restrictions will vanish.
The appearance of Hong Kong financial-services enterprises and their widening range of mainland services is obviously good news to SMEs. Although failing to instantly solve every financial problem, the growing presence of Hong Kong service providers does dramatically elevate the entire industry.
WRITTEN BY JASON GERBER
Banking Services At A Glance
HONG Kong financial services readily available in leading cities on the Chinese mainland include:
- Working capital loans
- Property-related loans
- Financial leasing
- Trade-finance facilities
- Documentary credit negotiations and collections
- Buying and selling foreign currency
- Issuing consumer charge or debit cards
- Travellers cheques or bank drafts
Major shortcomings apply to:
- Domestic currency business
- RMB's lack of full convertibility
Among the advantages for Hong Kong financial institutions are:
- Strong reputations and perceived stability
- Ability to leverage on relationships with banks worldwide
- Good knowledge of international practices
- Experience and efficiency in handling trade-related transactions
- Assurance of international-standard services
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