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Junior asks:

The Chinese Government started reforming the banking sector significantly in 2005 by letting Shanghai based Bank of Communications (”BCom”) list on the Hong Kong Stock Exchange.

BCom was a pathfinder in the reform as HSBC, one of the UK’s largest financial groups was allowed to become its biggest foreign shareholder holding no more 20% of its shares, the largest percentage allowed under Chinese law for foreign interests.

All subsequent initial public offers (”IPO”) in Hong Kong by Chinese state commercial banks followed the model of the Chinese government allowing major foreign bank groups to hold a minority stake in the banks.

BCom’s IPO was followed later in the same year by China Construction Bank, one of the big 4 state owned banks. 2006 was a watershed year for the major state owned banks.

Both the biggest (Industrial and Commercial Bank) and second largest (Bank of China) Chinese state owned banks successfully listed on both Hong Kong and Shanghai Stock exchanges. Industrial and Commercial Bank’s listing had the distinction of being the largest global IPO in 2006.

The Agricultural Bank is the only remaining Chinese state owned commercial bank that remains to be restructured for IPO.

With the subsequent successful listing and the Chinese banks being well capitalised as a result, the following scenerios are being envisaged for the Chinese banking sector

- Intense competition across the sector as foreign banking groups are now allowed to conduct business in China as geographic and customer restrictions on RMB services were removed in December 2006.

- Consolidation of branches by the listed state owned banks, the number of branches have decreased rather than increased.

- An increasing emphasis to developing fee income as opposed to lending more loans such as wealth management products. To date, ICBC has the largest number of such wealth management centres of the 4 state owned banks.

- An increasing emphasis being placed on consumer finance such as developing consumer loans and credit cards to encourage domestic spending. China Merchants Bank and China Construction Bank are the two banks with the most number of credit and debit cards issued.

- Increased competition at the retail level as a number of foreign banking groups have expressed intention to incorporate locally in China to enter this business. To date, Citibank, Standard Chartered Bank, Hang Seng Bank, JP Morgan Chase has already been approved to incorporate locally.

- Innovation new products been introduced by the state owned banks to lessen reliance on making just plain loans such as treasury and trade financing products.

- The banking sector facing competition from insurance giants such as China Life and Ping An both setting up bank subsidiaries.

- State owned banks venturing overseas as China becomes a economic powerhouse and follows locally grown Chinese MNCs going overseas.

- Improved risk management processes of the banks as the Chinese government have stressed that the state owned banks must be operated on a commercial basis.

- Improved corporate governance of the state owned banks due to global pressures to improve shareholder returns.