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Financial services for China’s newly affluent

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The creation of wholly owned branch networks is likely to be a critical component of a winning strategy because they provide a platform for cus- tomer access and brand building. Leading foreign banking groups such as Citibank and HSBC are building their own branch networks in central locations (for instance, the Bund and Pudong financial districts in Shanghai) and luring top customers. For now, these branches are limited by regula- tion to foreign-currency deposits and loans, mainly to expatriates and affluent locals. But come deregulation, in 2007, they will be free to take local-currency deposits and to offer renminbi-denominated credit cards, mortgages, and other personal-lending products—a market whose profits are likely to grow by 30 percent a year. They will also have the right to market other products, such as life insurance and mutual funds (Exhibit 2).

Partnerships with Chinese institutions will probably be necessary for foreign banks that wish to compete for the affluent market. Since most product markets are now closed to them, such an alliance is the only way to get in early, become acclimated, and master the skills needed for success. What’s more, if market conditions change and the government alters its regulatory agenda with a view to limiting the expansion of foreign banks, partnerships are less likely to be affected. With them in place, the foreigners can pounce if opportunities arise early and stay ahead of the curve if the markets develop according to script.

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