Chinese banks welcome market opening

BEIJING (Reuters) - China will dismantle barriers to foreign bank competition by the end of the year, but local lenders are confident their years of restructuring will prepare them to go head-to-head with overseas rivals.

Global giants including Citigroup Inc. (C.N) and HSBC Holdings Plc. (HSBA.L) (0005.HK) will be allowed to offer yuan-denominated services to local customers starting in December, as part of China's obligations for entering the WTO.

Foreign competitors come armed with sophisticated investment products, international brands and efficient back office operations to target China's $2 trillion in personal savings.

But Chinese banks have cleaned up their balance sheets, upgraded their customer service and started acting like commercial ventures rather than the lending arm of local government offices.

"Before we competed with pistols. Now we have AK-47s and cannons," Zhu Min, executive assistant president at state-run Bank of China (3988.HK) (601988.SS), said in an interview this week during the Reuters China Century Summit.

The battlefield is tilted in the favor of Chinese banks.

The country's Big Four lenders -- Industrial and Commercial Bank of China (ICBC) ICBC.UL, Bank of China, Construction Bank (0939.HK) and Agricultural Bank of China ABC.UL, in order of asset size -- have more than 75,000 nationwide branches.

HSBC, which has one of the largest foreign networks on the mainland, has only 23 outlets.

"For foreign banks to establish a network in such a big market, big country, is not so easy -- at least not fast," Construction Bank Chairman Guo Shuqing told the Reuters Summit. "Maybe after 5 to 10 years there will be a real big competitive challenge to CCB, ICBC and Bank of China."

Bank of China, in an indication of how important it views the domestic market, now generates 75 percent of net profit from the mainland, compared with only 25 percent three years ago.

COOPERATION AND COMPETITION

To be sure, foreign banks and local banks have very different objectives. Overseas lenders are targeting the country's richest people, while Chinese banks seek to be financial supermarkets for a big portion of the country's 1.3 billion population.

"If you compare ABN AMRO with local banks, you are comparing apples and oranges -- we will never have what they have," said ABN AMRO AAH.AS China Chairman Qiu Zhizhong, referring to the local lenders' networks. "But we have advantages over other foreign banks in terms of product capabilities."

The Dutch bank, which has 12 mainland outlets and plans to open 20 more in the next three years, targets retail customers with minimum annual incomes of $100,000. Foreign banks think they can attract wealthier customers with high levels of service and more sophisticated products as regulations allow.

In the race to offer wealth management services and credit cards, however, foreign banks will cross paths with local lenders.

Citigroup has issued about 400,000 credit cards with Shanghai Pudong Development Bank (600000.SS), in which it plans to raise its investment stake to 19.9 percent from nearly 5 percent.

"There's a lot of healthy cooperation and competition between Chinese banks and foreign banks," said Citigroup China Chief Executive Richard Stanley at the Reuters Summit. "In the years to come I think there will be more cooperation."

NEW AMMO

A critical mass of branches and large existing customer bases are no longer the only advantages that Chinese banks can flaunt.

Beijing has spent $60 billion on capital injections to clean up the balance sheets of Bank of China, Construction Bank, and Industrial & Commercial Bank of China, which is planning to raise up to $21 billion in an October IPO.

The banks have also teamed up with foreign partners including Bank of America (BAC.N) with Construction Bank, and Royal Bank of Scotland (RBS.L) with Bank of China.

"We found a strategic partner," said Bank of China's Zhu, an integral part of the bank's $13.7 billion dual listings in Hong Kong and Shanghai this year. "Since then everything's changed."

But there is still plenty of work to be done, as China's state lenders scored low marks in a recent customer satisfaction survey done by management consultant Bain & Co.

Bank of China, for one, will spend 10 billion yuan ($125 million) to upgrade its data systems and centralize back office operations over the next three years.

"To become world-class banks, they need to invest heavily in infrastructure and risk management," said Henry Chow, CEO of IBM (IBM.N) China, which derives almost a third of its revenues from the financial sector.

(Additional reporting by Tony Munroe and Jack Reerink)