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Financial services for China’s newly affluent

Retail banking in China

The race is on to make money from individual consumers. Foreign banks had better get into the game.

David A. von Emloh and Yi Wang

Chinese banking faces a dramatic transformation over the next ten years. While we expect the overall profits of the sector to grow at an annual rate of about 10 percent, the source of its earnings will change signifi- cantly: by 2013, we estimate, corporate banking’s now overwhelming share of the sector’s profits will decline to little more than half as profits from retail banking increase more quickly (Exhibit 1, on the next page).

Three main forces will propel these developments. The first is strong and increasingly consumption-driven GDP growth, ranging from 7 to 9 percent in recent years. Prosperity will boost demand for retail-lending products such as car loans, credit cards, and mortgages. Second, demand for traditional corporate-banking products, particularly deposits and loans, will fall. As Chinese companies centralize their cash management, the “stocks” of deposits held by each of their provincial operations will be greatly reduced. Moreover, Chinese companies now rely almost entirely on bank debt for financing, but over the next ten years we expect the development of capital markets to reduce demand for loans. Third, over the next five to seven years, we believe that the Chinese government will gradually deregulate interest rates. That will significantly reduce margins on both deposits and corporate lending.

The shift in the profit mix from corporate to retail gives foreign banks a golden opportunity to tap into the Chinese banking market by targeting affluent customers, much the most attractive segment. Their financial needs are diverse, and they account for the vast majority of auto, mortgage, and personal-lending balances. Although they make up a mere 2 percent of the retail customers of Chinese banks, they account for as much as 55 to 65 percent of retail-banking profits. The “mass-affluent” segment accounts


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