In anticipation of the opening of the mainland's banking industry to full foreign competition, much of the mounting excitement from international analysts and institutions has centred on the potential of retail banking, especially of the credit card market. The prospects of corporate banking are generally less positive. Some observers predict that changes on the mainland will diminish the need for Chinese businesses to seek loans from banks.

Yet Standard Chartered's Andrew Bester, co-head of wholesale banking for China and Japan, believes that there is still much to expect from providing banking services to companies in China.

"The requirements of Chinese corporate banking customers are fast evolving - products needs are changing, expectations of banks are changing in terms of the products and services that they require," he says.

Parallel with the mainland's continuing developments, Standard Chartered looks to provide solutions and services as business needs evolve, the domestic firms realize international ambitions, and the fixed income market emerges.

Long established in China, Standard Chartered currently has a presence in most of the major mainland cities. Its ten branches, two sub-branches and four representative offices cover three major geographical regions: the Bohai region around Beijing, where it serves major Chinese banks and State-owned enterprises (SOEs) in their domestic and international needs; the Yangtze River Delta, home to most multinational company (MNC) head offices around Shanghai and investment from Taiwan, Hong Kong and other Asian countries; and Guangdong Province, primarily the Pearl River Delta, China's manufacturing capital. These areas represent a US$13-14 billion segment attractive to Standard Chartered's wholesale (corporate) banking business.

Standard Chartered's first half results for 2005 show that this is a growing business. Though it did not release specific numbers for China, its wholesale banking operations for the "Other Asia Pacific" region (excluding Hong Kong) produced an income of US$330 million, a rise of 49 per cent from the same period in the previous year.

But questions about the potential of corporate banking in China remain.

An inevitable trend?

In a 2004 report, American consulting firm McKinsey predicted that "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."

While this may be an inevitable shift after foreign institutions are finally allowed to pursue renminbi customers on the mainland, the same report warns that "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 10 years we expect the development of capital markets to reduce demand for loans."

The report also predicts that interest rates will gradually be deregulated, which would affect margins for corporate lending.

Jonathan Anderson - chief Asian economist at UBS - echoed these sentiments in an article in the Far Eastern Economic Review. "For two decades, mainland firms have had no other source of outside financing, and mainland households have had no place else to put their savings. But this could change quickly. As China's nascent equity, bond and property markets mature, we expect a steady deleveraging on the part of companies, and a steady diversification on the part of Chinese savers. So while consumer banking is a promising development area, corporate lending isn't," he wrote.

Not everyone sees this as an inevitable trend, though. Bester cites the fast changing needs on the mainland - much of which extends far beyond lending - as new and expanding opportunities for the corporate banking sector. China's mainland has become a place not only filled with international businesses and their sophisticated needs, but domestic companies are reaching a point where they demand banking services commensurate to those of international firms.

"It's about how you capture different flows that exist," says Bester.

One promising area for Standard Chartered is cash management service, which would enable companies to have a full and simplified view of their cash across China, Asia or the world, according to Bester.

"Cash management is interesting because we have good product capability, good technology, and we are able to work with our clients, often with arrangements with Chinese partner banks, to provide them with good views on what's happening with their funds across China."

Supply chain financing has also become in demand. As China develops, more and more large MNCs would like to operate on an open account basis as opposed to with a letter of credit, says Bester. Trading in China usually involves a letter of credit to insure the trade cycle. But now a growing number of companies are setting up open accounts, where an invoice is sent and the corresponding party pays the issuer in 30 or 60 days. To facilitate this set-up, Standard Chartered provides structures that assist both companies to manage their working capital through their cycles.

Also, outbound investment by the mainland's SOEs and larger private companies have been growing in the last few years. Whether in search of natural resources or to expand beyond the domestic market, this trickle will likely widen in the near future.

"For those leading Chinese companies, including some of the leading SOEs, the international ambitions have been changing exponentially."

International acquisitions and other global activities would boost the need for corporate financial advice and other services as Chinese companies' requirements become more similar to MNCs.

Standard Chartered was one of the lead financiers for Lenovo in its purchase of IBM's personal computer business.

Domestically, the changing tides in corporate financing could also bring business possibilities. Bester points to the fixed income market in China as an example. He foresees that over time, there will be significantly more fixed income issuance in China, giving corporations more options than bank lending to support their funding and financing requirements.

"As we see more deregulation in areas such as fixed income, derivatives, foreign exchange - things are moving in the right direction - we want to move to continue to be at the cutting edge of those new products and capabilities. It's an ongoing journey for us."

Integration advantage

This journey will become more difficult even as China opens up its banking market. The year 2005 already saw multiple international banks buy into Chinese lenders, and this will undoubtedly continue this year.

Nonetheless, Bester thinks that Standard Chartered stands out from its competitors, with its combination of a long history in China and of actively providing solutions to clients. He also believes the bank's integration of Hong Kong, Taiwan and the mainland as its China market is one of Standard Chartered's advantages.

"I think the other point of our differentiation is operating our wholesale banking business as a single franchise for China is important to differentiate us," he says. "Clearly regulations are different in different regions, but effectively, what we seek to do is provide the solutions for our clients across the various borders but always mindful of the fact that the regulations are complex. The clients are thinking in an integrated way, our banking teams are positioned in an integrated way, our technology solutions for things like cash management are we think about it in an integrated way across China, and the mindset of our people is very much 'How do we drive integrated business for our clients?'"

Editor: Yan