Review and Outlook of Chinese Banks in Hong Kong

KPMG China December 2017

kpmg.com/cn Review and Outlook of Chinese Banks in Hong Kong 01

2017 is the 20th anniversary since Hong Kong returned We sincerely thank the following bankers for their to mainland China. In these 20 years, Hong Kong has contributions to this publication (in alphabetical order by experienced rapid development and gained mutual name): benefits with mainland China. Chinese banks in the city have also experienced healthy growth in the past 20 - Chen Linlong, Chief Executive Officer, China Everbright years, benefitting from the closer economic and financial Bank Co., Ltd., Hong Kong Branch relations between Hong Kong and mainland China. - Du Yunfei, President, China Minsheng Banking Corp., Ltd. Hong Kong Branch As one of the major global international financial centres, the economic growth of Hong Kong’s banking industry has - Gao Ming, Chairman and Executive Director, Industrial been higher than its GDP growth since 1997. In KPMG's and Commercial Bank of China (Asia) Limited publication, “Review and Outlook of Chinese Banks in - Jiang Xianzhou, Vice Chairman and Chief Executive Hong Kong”, the performance of Chinese banks in Hong Officer, China Construction Bank (Asia) Corporation Kong over the past 20 years and their future are discussed Limited in two parts. - Ma Zhiwen, President, Bank of Shanghai (Hong Kong) The first part of the publication analyses data disclosures Limited of Chinese licensed banks, restricted licence banks and - Sun Long, Chief Executive Officer, Agricultural Bank of deposit-taking companies in Hong Kong ("Chinese Financial China Limited Hong Kong Branch Institutions in Hong Kong") in the annual reports from 1997 - Wang Feng, Chief Executive, Bank of Communications to 2016 issued by the Hong Kong Monetary Authority Co., Ltd Hong Kong Branch (“HKMA”), as well as other areas of development of Chinese Financial Institutions in Hong Kong over the past - Xia Weichun, Chief Executive, Industrial Bank Co., Ltd 20 years. Hong Kong Branch

- Yue Yi, Vice Chairman, Executive Director and Chief The second part of this report features summaries from Executive, Bank of China (Hong Kong) Limited interviews with 12 bankers, and their forecasted prospects of five key areas: RMB internationalisation, the Belt and - Zhang Li, Chief Executive Officer, Shanghai Pudong Road and Greater Bay Area Initiatives, fintech development Development Bank Co., Ltd Hong Kong Branch in Hong Kong, the opportunities and challenges of setting - Zhang Xiaowei, President and Chief Executive Officer, up corporate treasury centres in Hong Kong, and the China CITIC Bank International Limited development of Chinese banks’ wealth management business in Hong Kong. - Zhu Qi, Chief Executive Officer, Wing Lung Bank Limited

Hong Kong, as one of the most important channels for China’s foreign commercial trade, has transformed gradually to an economy that is led by commercial and financial services. Hong Kong’s GDP in 2016 reached HKD 2,500 billion, an increase of 81 percent compared to 1997. As a major international financial centre, the Hong Kong financial services sector’s growth rate has been higher than the GDP rate, and has become the most important base for multinational financial institutions since its return to mainland China in 1997.

According to data from the annual reports of the HKMA from 1997 to 2016, the development of the Chinese banking industry in Hong Kong over the past 20 years has the following features:

Total assets have increased dramatically, and the number of organisations has expanded gradually. Since 1997, the size of the Chinese Financial Institutions in Hong Kong’s total assets has expanded significantly. According to information from the HKMA, the total assets of Chinese Financial Institutions in Hong Kong was HKD 957 billion in 1997, while this figure reached HKD 7,260 billion in 2016. The size of total assets has expanded by 660% over the past 20 years, while the compound annual growth rate was 11%. As for the industry’s average, the average total assets reached HKD 279.2 billion in 2016, an increase of 920% over the past 20 years, while the compound annual growth rate was 13% (1997: HKD 27.3 billion).

In addition, over the past 10 years, the number and size of the Chinese Financial Institutions in Hong Kong doubled, mainly due to the promotion of multiple Hong Kong-China cooperation policies and the globalisation of the financial services sector in mainland China. In these 10 years, a number of Chinese banks, including Bank of Shanghai, Industrial Bank, China Minsheng Bank, China Everbright Bank, Shanghai Pudong Development Bank and China Development Bank, entered the Hong Kong market to set up local branches through acquisition or investment. As a result, the number of Chinese Financial Institutions in Hong Kong increased from 16 in 2007 to 26 in 2016 (an increase of 170%).

An increasing industry impact. Since 1997, the Chinese Financial Institutions in Hong Kong have become more significant in the local market, which mainly contributed to the increased segmentation in total assets and financing facilities in Hong Kong. For example, the total assets of the Chinese Financial Institutions in Hong Kong in the local market increased from 11% in 1997 to 35% in 2016, and the borrowing and savings facilities of the Chinese Financial Institutions in Hong Kong in the local market increased from 11% and 22%, respectively, in 1997 to 39% and 34%, respectively, in 2016.

In addition, over the past 10 years, the impact of the China Financial Institutions in Hong Kong in the local market grew steadily. The total assets and loan balance of the Chinese Financial Institutions in Hong Kong increased from HKD 571 billion in 2006 to HKD 3,132 billion in 2016, representing a compound annual growth rate of 18%. By the end of 2016, the average assets and financial facilities of the Chinese Financial Institutions in Hong Kong exceeded the Hong Kong local market’s average by a third, which indicates that the Chinese Financial Institutions in Hong Kong are becoming more significant in Hong Kong’s local market.

Changes to the asset structure of Chinese Financial Institutions in Hong Kong

Asset proportion of Chinese Financial Loan proportion of Chinese Financial Deposit proportion of Chinese Institutions in Hong Kong Institutions in Hong Kong Financial Institutions in Hong Kong

Total assets of Chinese banks Total loans of Chinese banks Total deposits of Chinese banks Total assets of other banks Total loans of other banks Total deposits of other banks

Data source: 1997 to 2016 annual reports issued by HKMA, KPMG China research

The globalisation of loan portfolios. Since 1997, Hong Kong’s offshore RMB market has progressed steadily, and the size of the Chinese Financial Institutions in Hong Kong has continued to grow. The credit balance of the Chinese Financial Institutions in Hong Kong increased by more than six times, from HKD 436 billion in 1997 to HKD 3,132 billion in 2016. Meanwhile, we notice that the Chinese Financial Institutions in Hong Kong’s loan portfolios are becoming more global. In 1997, the loan portfolios of the Chinese Financial Institutions in Hong Kong were mainly constrained within the Hong Kong market (91%). However, the loan investment decreased significantly to 66% in 2016. Together with the advancement of RMB internationalisation and the establishment of Hong Kong as an offshore RMB clearing centre, the correlation between the Chinese Financial Institutions in Hong Kong and the financial institutions in mainland China will be strengthened. The trend of globalisation of the loan portfolio will become more distinct.

Changes in loan portfolios of Chinese Financial Institutions in Hong Kong

In HKD million

Loans to customers inside Hong Kong Proportion of loans to customers inside Hong Kong Loans to customers outside Hong Kong Proportion of loans to customers outside Hong Kong

Data source: 1997 to 2016 annual reports issued by the HKMA; KPMG China research

© 2017 KPMG Huazhen LLP — a People's Republic of China partnership, KPMG Advisory (China) Limited — a wholly foreign owned enterprise in China, and KPMG — a Hong Kong partnership, are member firms of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in China. The KPMG name and logo are registered trademarks or trademarks of KPMG International. Review and Outlook of Chinese Banks in Hong Kong 05 Future prospects of Chinese banks in Hong Kong Prospect 1 The impact of RMB internationalisation on the development and future of Chinese banks in Hong Kong

RMB internationalisation is an important strategic priority for the Central Government and the People's Bank of China. With the largest offshore

Gao Ming RMB market, Hong Kong's financial industry is undoubtedly the first and Chairman and biggest beneficiary of RMB internationalisation. Executive Director Industrial and In the future, the trend of RMB internationalisation will not change, and Commercial Bank of will continue to follow the idea of "trade first", which lays a good foundation China (Asia) Limited for the increasing circulation of RMB in the capital market.

Along with the development of For the next 12 months, the main direction of RMB business development RMB internationalisation, the RMB expected by various Chinese banks in Hong Kong is in RMB cross-border is getting stronger as a means of financing – that is, RMB business will not rigidly adhere to traditional payment for international trade. loan, bond and exchange business. With the advancement of RMB internationalisation, the proportion of individuals and enterprises not from mainland China in the RMB fund pool in Hong Kong has gradually Jiang Xianzhou increased, and the proportion of foreign investors among offshore RMB Vice Chairman and bond buyers is also increasing. Chinese banks in Hong Kong should Chief Executive Officer actively expand and participate in offshore RMB business between non- China Construction residents to seize the opportunities emerging from the opening of the Bank (Asia) capital market in mainland China. They should also actively participate Corporation Limited in major projects (such as the Shanghai-Hong Kong Stock Connect, Shenzhen-Hong Kong Stock Connect and Bond Connect programmes) to Chinese banks in Hong Kong capitalise on the business opportunities in this area. may have to consider how to deal with the higher requirements from In addition, bankers also recommend that the HKMA should consider customers on the diversity of having more discussions with banking industry regulators in mainland banking products. China as well as the People's Bank of China on how to further open up and integrate RMB markets between Hong Kong and mainland China. If regulators in both jurisdictions allow Chinese banks in Hong Kong to Yue Yi enter the inter-bank market in China and borrow and lend RMB in certain Vice Chairman, Executive Director amounts, it would be beneficial as it partially solves the problem of and Chief Executive insufficient market depth due to a limited pool of offshore RMB funds. Bank of China (Hong Kong) Limited

In response to the fluctuation of the RMB exchange rate, Chinese banks in Hong Kong may have to actively promote the diversification of RMB business.

As a key foreign economic strategy for mainland China, the Belt and Road initiative aims at linking the Silk Road Economic Belt to the Maritime Silk

Sun Long Road, and actively developing economic partnerships with countries along Chief Executive the routes. Hong Kong is an important node for the Belt and Road initiative, Officer as well as one of the three pillars in the Greater Bay Area. Agricultural Bank of China Limited Hong Chinese banks in Hong Kong should seek to better serve the Belt and Road Kong Branch and Greater Bay Area initiatives. These banks have insight into mainland enterprises, and could take advantage of the well-established resources from their parent banks to achieve steady growth. The Belt and Road initiative brings enormous financing requirements. Funds need to be In addition, Chinese banks in Hong Kong may have to actively expand raised from international financial to international markets and secure cross-regional financial cooperation centres such as Hong Kong, which projects. At the same time, they have to constantly innovate their products creates a large number of business and services, and provide more financing services to meet customer opportunities for the banking needs. industry in Hong Kong.

Wang Feng Chief Executive Bank of Communications Co., Ltd Hong Kong Branch

To better serve the Belt and Road and Guangdong-Hong Kong- Macau Greater Bay Area initiatives, there are three key areas to focus on. The first is to take advantage of the entire group and deepen cross- border, cross-industry and cross- market cooperation. The second is to align with clients' strategies and to support infrastructure construction along the Belt and Road. The third is to provide innovative products to meet diversified customer needs.

Due to the great spillover of investment in fintech, Hong Kong financial institutions – which have always been well-known in the traditional financial field – have been more cautious. The development and construction of Zhang Xiaowei fintech in Hong Kong has been encouraging, but there is still room for President and Chief development. Executive Officer China CITIC Bank International Limited Firstly, effective system upgrades and process optimisation are needed, as well as the improvement of infrastructure and the regulatory environment. In terms of user experience, real-time electronic payment platforms and The Hong Kong government the new concept of smart banks are undoubtedly the most critical needs needs to carefully consider how to of fintech at this stage. balance the relationship between the benefits and the overall risks Secondly, the training of fintech talent in Hong Kong needs to continue of fintech to the banking to develop. At present, fintech talent in Hong Kong, especially those industry. who know both finance and technology, is scarce, and the number of professionals who have practical development experience in the application of fintech is scarcer. The issue of training and retaining fintech talent needs to be considered by the Hong Kong government from a policy Du Yunfei level, as well as by the banks. President China Minsheng The development of fintech in Hong Kong also needs the support of Banking Corp., Ltd. Hong Kong Branch government policies. For example, the government can refer to the mainland and overseas market experience and provide support for fintech applications such as electronic Know Your Customer and Application The popularisation of fintech Programming Interface. should not come from regulatory provisions or requirements, but In addition, Chinese bankers in Hong Kong suggest that the regulators from the increasing daily needs of should further liberalise constraints of cross-border banking groups’ people as we progress into a new insourcing and outsourcing management. This will enable Hong Kong era. banks to use more convenient and unified management information systems and fintech used by their parent banks in the mainland.

Zhu Qi Chief Executive Officer Wing Lung Bank Limited

In the future, Chinese banks in Hong Kong may have to strengthen their communication with the mainland Chinese technology enterprises. They can leverage the advantage of those technology enterprises and talent to support the growth of Chinese banks in Hong Kong.

The well-developed capital market in Hong Kong gives a secure channel for mainland companies to invest and allocate assets globally. Over the last several years, the HKMA has actively communicated with local Xia Weichun governments and authorities in mainland China to encourage companies Chief Executive to set up more corporate treasury centres in Hong Kong, and assist the Industrial Bank Co., Ltd Hong Kong mainland companies with understanding the relevant policies. Branch Corporate treasury centres need to arrange cross-border financial activities, including cash management, interest risk management, fundraising and investment management. Firstly, corporate treasury The experience of Chinese banks in Hong Kong in providing centres control all bank transactions, collections and payments businesses services to mainland customers within the group under its jurisdiction. It would be a great advantage is a great advantage for them if corporate treasury centres could provide tailored cross-border cash in the market. Only by truly pooling solutions for mainland companies. Secondly, corporate treasury understanding customers, and centres need to focus on interest rate risks and exchange risks within their needs and pains, can we put their jurisdiction, and would therefore have greater demands for certain ourselves in our clients' shoes to derivatives. work out feasible solutions to meet their demands. Chinese bankers in Hong Kong note the strict local regulatory requirements in terms of account opening, client risk assessments, anti- money laundering, etc. Although such supervision does not constitute a substantial barrier for the corporate treasury centres in Hong Kong set up by large-scale Central Government or state-owned enterprises, this Chen Linlong has caused some difficulties for some small and medium-sized mainland Chief Executive companies or privately-owned enterprises looking to extend their footprint Officer China Everbright in Hong Kong. Bank Co., Ltd., Hong Kong Branch There is appetite from mainland companies to set up corporate treasury centres in Hong Kong. Together with ongoing cross-border regulatory cooperation, this will help provide a robust environment for the steady In the future, Hong Kong will development of Hong Kong's financial industry. not only be an important location for mainland enterprises to manage their global investment, but also a core hub for them to manage and operate overseas business, especially in the Asia Pacific region.

Hong Kong, with its unique legal, social and economic environment, provides high-net-worth individuals – especially those in mainland China –

Zhang Li with a stable platform. Chief Executive Officer Shanghai Pudong The Chinese banks in Hong Kong should seek to develop their wealth Development Bank management practices in the Asia Pacific region. This requires attention in Co., Ltd Hong Kong three areas: Branch

Firstly, the banks may need to focus on customer resources in mainland China to achieve precision marketing. The reason Hong Kong is a leading wealth management centre lies in its unique external Secondly, promotion of the application of artificial intelligence (AI) and environment, which is mainly technology in financial services is needed. AI can contribute to the manifested in three aspects: assessment of customer risk tolerance, optimisation of investment the legal, social and economic procedures, and the automation of investment advisory to improve the environments. efficiency of wealth management services. Using technology and big data in financial services can help identify and target more accurate customer segments and channels for popular wealth management products.

Thirdly, the banks may also need to increase their investment in professional talent.

With Singapore priding itself as a mature wealth management centre

Ma Zhiwen in the Asia Pacific region, Hong Kong should define its current position and future directions to explore further improvements and improve its President Bank of Shanghai competitiveness: (Hong Kong) Limited 1. For compliance, Hong Kong could promote simplified procedures for account opening and product sales to more mature, experienced and wealthy customers, in order to attract more investments and customers Investing in talent in wealth from the neighbouring jurisdictions. management is key for the Chinese banks in Hong Kong to meet the 2. For tax, the Hong Kong government could explore the possibility of growing wealth management needs from both Hong Kong and reaching double tax agreements and treaties with more countries and/ mainland China. or regions.

Hong Kong should proactively expand its services to the Southeast Asian market and develop with Singapore jointly to solidify itself as a leading wealth management centre.

Simon Gleave Edwina Li Simon Topping Partner, Regional Head Partner, Head of Partner Financial Services Financial Services Assurance Regulatory Advisory : +86 (10) 8508 7007 : +86 (21) 2212 3806 : +852 2826 7283 : [email protected] : [email protected] : [email protected]

Arthur Wang Lewis Lu Paul McSheaffrey Partner Partner Partner, Head of Banking & Capital China Head of Banking China Head of Tax Markets, Hong Kong +86 (10) 8508 7104 +86 (21) 2212 3421 : +852 2978 8236 : : [email protected] [email protected] : [email protected] : :

Thomas Chan Kevin Liu Rita Wong Partner Partner Partner Financial Services IT Advisory Financial Services : +86 (10) 8508 7014 : +86 (21) 2212 3980 : +852 2978 8172 : [email protected] : [email protected] : [email protected]

Sam Shi James Chen Terence Fong Partner Partner Partner Financial Services Financial Services Financial Services : +86 (10) 8508 7112 : +86 (21) 2212 2424 : +852 2978 8953 : [email protected] : [email protected] : [email protected]

Walkman Lee Kenny Shi Joan Wong Partner Partner Partner Financial Services Financial Services Transaction Services : +86 (10) 8508 7043 : +86 (21) 2212 2261 : +852 2140 2862 : [email protected] : [email protected] : [email protected]

Ellen Jin Penny Li Tiffany Wong Partner Partner Partner Financial Services Financial Services Restructuring Services : +86 (10) 8508 7012 : +86 (21) 2212 2285 : +852 2140 2367 : [email protected] : [email protected] : [email protected]

Louis Ng Stan He Rani Kamaruddin Partner Partner Partner, AML and Sanctions Transaction Services Restructuring Services Regulatory Compliance : +86 (10) 8508 7096 : +86 (21) 2212 3540 : +852 2140 2815 : [email protected] : [email protected] : [email protected]

Tracy Zhang Cathy Zhou Stanley Ho Partner Partner, AML and Sanctions Partner Tax Regulatory Compliance Tax : +86 (10) 8508 7509 : +86 (21) 2212 3289 : +852 2826 7296 : [email protected] : [email protected] : [email protected]

Jin Cao Ivan Li Michael Monteforte Partner Partner Partner Financial Risk Management Financial Services Financial Risk Management : +86 (755) 2547 3428 : +86 (755) 2547 1218 : +852 2847 5012 : [email protected] : [email protected] : [email protected]

© 2017 KPMG Huazhen LLP — a People's Republic of China partnership, KPMG Advisory (China) Limited — a wholly foreign owned enterprise in China, and KPMG — a Hong Kong partnership, are member firms of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in China. The KPMG name and logo are registered trademarks or trademarks of KPMG International. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

The KPMG name and logo are registered trademarks or trademarks of KPMG International.

Publication date: December 2017