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Matthews InternatIonal CapItal ManageMent, llC
the BankIng Issue
 AsiA
now
issue 2
2006
 Banks across Asia are undergoing a profound transformation—cultural  as well as operational—in an effort to capitalize on the region’s growth.
Bankng on Aa
 Investing in foreign securities may involve certain additional risks, including exchange-rate fluctuations, less liquidity, greater volatility and less regulation. Single-country and sector funds may be subject to a higher degree of market risk than diversified funds because of concentration in a specific sector or geographic region.
Also in this issue
6
How AsiA’sBAnks ArecHAnging
9
cHinA:setting tHe pAce
12
profile ofAsiAn BAnking
   i   l   l   u   s   t   r   A   t   i   o   n    B   y   B   r   A   d    y   e   o
 
t
en years ago, going to the bank wasan unpleasant chore for Dr. WanzhenXie. Her bank had only a few officesfor citizens in her home city of Guangzhou,China. She had to wait in a long line to transacther business. When she finally reached theteller window, the staff treated her indifferently.The concept of bank service was foreign in aneconomy that, in spite of incipient reform, wasstill state controlled. Yet the doctor had littlechoice. China’s fledgling investment marketswere too risky for the average saver. The bankswere otherwise the only place a consumercould earn a reasonable rate of return.Today, China’s banking landscape haschanged in ways that are nothing shortof astonishing to Wanzhen’s generation.Convenient bank branches seem to havesprung up all over Guangzhou. Instead ofwaiting in line, she can take a number and sit
 
comfortably until she’s called. While waiting, shecan watch the wide-screen televisions touting newproducts like mutual funds and CDs—at rates thathave become more favorable since banks actuallybegan competing for customers. The clerks aresolicitous and eager to answer questions abouttheir products and services. Of course, WanzhenXie doesn’t have to go to the bank as often any-more. Her monthly bills are paid automatically.Meanwhile, her son, Hongyi Gao, hardly eversets foot in a branch. A year ago, he began bankingonline and signed up for a service that sends himhis balances and recent activity by phone. He hasaccounts at three different banks in order to takeadvantage of different services. He also has some-thing virtually unheard of in China ten years ago—acredit card. Unlike their elders, the younger genera-tion of urban Chinese is less and less averse to bor-rowing. Hongyi’s dual currency card enables him tocharge purchases on credit when he travels to HongKong or Macau as well as much of the mainland.While all this may sound fairly standardto Americans, it is revolutionary in China, andsymbolic of the profound changes sweepingthrough banking systems throughout Asia. Thesame forces that are driving the region’s economicgrowth—market deregulation, rising consumerprosperity and technological advancement—arereshaping Asia’s banking business fundamentally.Furthermore, this change is happening none toosoon: any further delay could severely cripple theregion’s continued progress and economic growth.
the Consumer BAnkingopportunity
By some projections, retail banking alone couldpotentially generate $180 billion in new revenuesbetween 2005 and 2010. Yet Asia’s banks have onlyrecently awakened to the opportunity of the con-sumer market, and are now faced with change ona massive scale in order to capitalize on it. Whilechanges to date have been comparatively rapid anddramatic, most observers believe that banks in Asiastill have a long way to go to achieve efficiency andsustainable growth. Doing so will require not onlyoperational and technical modernization, but also
cHineseconsumersAre stillvery new totHe ideA ofpurcHAsingon credit.todAy, mostcArd-BAsedtrAnsActions—indeed,Almost AlltrAnsActions—Are stillcAsH-BAsed.
Banking on asia
Continued
2
 
AsiA now /
The Banking Issue
Bank Cards Issued In ChIna
02004006008001,0002005200420032002200120001999
BANK CARDSin Millions
■
 
Debit Cards
■
 
Credit Cards
CAsh is king:
 pa  a cha a. m chha a b ah a  ha, b 40  a ha b  a  1.3 b .
76%
 ach baa a ahaa
s: m lh
 
a cultural transformation and a profound changein the role banks have historically played in Asia’seconomies and societies.
A historiC shift
Imagine that you could not buy a car or send achild to college unless you had all the money topay for it in your savings account. Or that you hadto apply to refinance the balance of your mortgageevery five years, with no longer-term options avail-able and no assurance of re-approval. Americans inparticular take access to credit on reasonable termsfor granted. It is in many ways the underpinningof a consumer society. We also take for granted thefinancial structure that makes it possible—a highlyefficient banking system that keeps capital flowingfreely and allocates it productively.Only recently have Asians begun to tap intocredit as a means of managing their lives. In con-trast to Americans, Asians have a strong savingsculture, due in part to a lack of access to crediton reasonable terms; this has forced individualsto adopt an extreme degree of financial indepen-dence. Meanwhile, Asian banks have taken saversfor granted. Banks have been happy to take moneyfrom consumers, but were extremely reluctant tolend it back until recently.Moreover, in the absence of competition,banks could pay low rates on deposits whilecharging higher rates for loans, generating widespreads that supported bloated bureaucracies. Thisarrangement was condoned (if not encouraged) by Asian governments that were keen to use banks asa tool of the state, fostering industrial developmentin favored sectors of the economy. Asian banks have historically served a socialpurpose, financing public infrastructure andconstruction projects that figured in government-driven growth strategies. Banks have long been theprimary conduit of capital in Asian economies,where capital markets (that make possible directinvestment in corporate equity or debt) have beenslow to develop. Traditionally, banks gathereddeposits from individuals and made loans to largecorporations and public works projects. Recipientsof those loans were often dictated by governmentin the name of economic development, with littleregard for their ability to repay.Consumers, meanwhile, had to look else-where for loans, as did entrepreneurs and smallbusinesses—often to the black market or so-called“curb” markets, on terms that Westerners wouldconsider usurious.While capital has not necessarily been in shortsupply in Asia, what supply does exist has often beenallocated inefficiently by banks. In China, where fourlarge state-owned banks control about two-thirds ofall banking assets, banks have traditionally been a gov-ernment instrument for financing large state-owned
AsiA now /
The Banking Issue
fInanCIng BusIness
0306090120150U.S.*India*ChinaJapan
ESTIMATED SOURCES OF CORPORATE FINANCE(as % of GDP, 2005)
■
 
Bank Loans
■
 
Equity Securities
■
 
Local Currency Bonds*
%
in sAfe keeping:
Ba ha a a  a   h  Aa’ aa a. wh q a ha a   a, h     a ha b .
*la c B aa  ia a h u.s. a a  2003; s: mah, AdB, Ba  Jaa,ciBc, u.s. fa r, u.s. BeA, rBi, Bb
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