regional focus
Building on China
Challengingtimes
What'sNewS Issue 2 March 2001
lf forecasts are met, the Chinese eco-
nomy will become the world's second
largest. And as the government's com-
mitment to reform strengthens, the
economie environment seems to be
changing for the long term. For banks,
the tide is finally turning in their favour.
Tough market
Logical thinking
Building know-how
Future focus
C /^\ur strategy in China today is a
combination of past and future,'
Ruurd Weulen Kranenberg explains. 'On
the one hand, it reflects the lessons, some-
times painful, learned in the past - nega-
tive financial performance and a high pro-
visioning level. On the other hand, RI's
strategy in the Mainland is positioning us
effectively to take advantage of the great
opportunities we see taking shape.' RI's
presente today in China consists of two
offices: a subsidiary in Shanghai and a rep
office in Beijing. While the government is
making efforts to liberalize the market,
our people in China teil us they're still op-
erating in an environment where foreign
banks are not on a level playing field with
local Chinese banks.
'It's still very difficult to navigate this mar
ket,' says Frits Mönking, Shanghai's newly
appointed GM. 'We're faced with re-
stricted product range and customer
access, no interbank market, very limited
legal enforceability combined with large
scale frauds and defaults. This, coupled
with a lack of internationally recognized
accounting standards and corporate gov-
ernance, resulted in negative returns for
almost all foreign banks. Given our expe-
rience in China that resulted in
painful rectification and re-
structuring, today's guiding
principles are caution and pru
dente.'
Yet despite these difficulties,
the lure of China's immense
market is substantial enough
to keep companies, and
banks, interested for the long Frits Mönking
term. That involves a special
approach to the market, Weulen Kranen-
berg explains. 'We have to be self-critical
and honest with ourselves. Does our pres
ente in China make sense? Yes, it does.
This is a huge market, and as long as we
don't lose our principles, and make sure
we're implementing effective risk manage
ment, we can sustain operations - at a low
cost - for quite a while.'
To make sure R1 is prepared as the econ-
omy opens up, a key strategie element is
developing deeper knowledge and insight
into the Chinese market. A recent Manag-
ing Board decision supporting an interim
Strategie Report on R1 in China facilitates
growth of local knowledge and expertise
in focus sectors. This allows RI's North
Fiast Asian offices to build the necessary
foundation for future business opportuni
ties, particularly in solvency friendly prod-
ucts. RI in also involved in a new B2B
website, foodChina.com, which holds
great promise for the future of F&A (see
related article).
'Our ntission is to be a credi-
ble financial services provider
to the Chinese F&A sector,'
continues Mönking. 'That
means developing fruitful re-
lationships with the top four
players in each of the 24
F&A focus sectors. Relation-
ship managers are responsi-
ble for building our credibil-
ity in each of those sectors, so that
ultimately we become sparring partners
to corporate decision-makers and foreign
investors in Mainland China. We know
who we want to be talking to, and where
we can offer them specialized services.'
Again, it's all about building and leverag-
ing RI's unique understanding of the food
and agribusiness. Product offering is
therefore centred on knowledge-intensive
products such as financial advisory serv
ices, M&A, and private placements, with
plain vanilla lending activities playing a
subordinate role. While TMI is not cur-
rently a priority in Chinese operations
(TMI is coordinated out of Hong Kong),
F&A very much is. Yet until government
policy becomes a bit more clear, China re-
mains a question of 'wait and see'.
Looking for additional insight into
the current state of the Chinese
economy? Then Ronald Fonteijn of
Utrecht's bank analysis is your man. He
recently co-edited two books (one in
Dutch, the other in English) on financial
reform in China, written by Tilburg
University's Professor Henk van
Gemert. 'China today is at a half-way
point,' Fonteijn explains. 'A lot has been
achieved, a lot still has to be done, par
ticularly in the financial system. Serious
weaknesses in the allocation of savings
and the distribution of financial services
hamper China's future economie devel-
opment. The great challenge for China
will be to continue its comprehensive
and ambitious reform process of im-
proving financial efficiency and enhanc-
ing financial discipline.'
A major factor affecting the financial
sector is the dominant role of the state:
it still holds close to 50% of the econ
omy, 70% of fixed assets and 80% of
working capital in manufacturing. 'The
fact that the government owns the
banks and the companies makes it both
boss and mother-in-Iaw,' Fonteijn ex
plains. 'In this conflicting role, effective
reform is often difficult.' As China's
entry into the WTO approaches, the
government is under increasing pressure
to speed up reforms. This is good news
for the banking sector, which has pro-
gressed less quickly than other sectors.
The government is currcntly focusing on
deficiencies such as the number of
non-performing loans at the state-
owned banks. 'The current financial sit-
uation is quite exciting,' Fonteijn adds.
'Everyone knows things are changing,
yet no one is exactly sure how. Whereas
China's past approach tended to be
gradual, this time, with strong competi-
tive pressure, radical steps are
necessary.'
