Banking Relations and Borrowing Money in China

By Timothy Anderson, timothyanderson2005@gmail.com

“The problem with banks”, said Michael Askew, President of the Business Development Bank and chair of the evenings panel discussion, “is they are famous for lending an umbrella when it’s sunny and taking it away when it rains”.

No different than their overseas counterparts, the two hundred-odd China-based foreign banks and countless local Chinese banks are eager to lend profitable companies with proven track records, steady cash flow and suitable fixed assets for security. For those, SME’s, service companies and start-ups looking for funds but who do not quite fit into this profile, the picture remains daunting. But what does seeking to borrow money in China entail?

“Assume absolutely nothing and don’t believe everything you hear”, remarked Rory Farquhar-Thomson, Deputy General Manager of San Paolo Imi and event panellist. “Rules and regulations are continually shifting. By asking right questions and getting the right advice, most things possible elsewhere are also possible in China. Talking to a lot of people on the ground and gaining as broad a picture of the market in question is a necessity.”

Nonetheless, the various legal standards, documentation levels and operating practises found in more developed countries are not yet the standard banking procedures in China. While the global trend is towards ‘paperless’ banking, in China bureaucracy and paperwork continue to obstruct efficiency.

On the other hand, Michael Askew noted 95% of his bank’s customer-base is Chinese companies borrowing money, dispelling the notion that it isn’t possible for foreign banks and Chinese companies to successfully do business. They had experienced zero bad debts from these loans to date, and generally required no foreign guarantees when lending in this fashion.

But is banking in China such a science?

Nigel White of Avis, the car rental company, presented an instructive case from his own company’s borrowing and banking relations in China. Avis has borrowed in RMB in China to fund the expansion of their car fleet - at a cost of capital higher than a U.S. dollar loan. Some would argue a missed opportunity from a purely financial perspective. But numerous China-specific considerations, such as the wishes of the company’s Chinese partner, had to be factored into the decision and Avis has had great success expanding its Chinese fleet from 800 to more than 2000 cars over three years with plans afoot for further expansion still.

Rory Farquhar-Thomson took up the query of Andrew Douglas, Business Manager at the European Chamber of Commerce in China, regarding his view of the motives of British banks acquiring minority stakes in Chinese banks. Mr. Farquhar-Thomson noted that any notion of a British bank attempting to stage a takeover of a Chinese bank (or attempting to set-up their own China-based retail network) was farfetched. However, with a minority stake in a Chinese bank and couple of board seats, British banks would be well positioned to utilise the existing distribution networks of these banks to market lucrative products of their own in China, such as mortgages and credit cards.

The Chinese government continues to make noise about creating a level playing field between local Chinese and foreign banks – though details remain sketchy. Nonetheless, opportunities for those seeking to borrow or lend money in China, and the standards that go along with it, should improve with time. Just don’t expect banks to start handing out umbrellas when it rains.

Originally published in March 2006 issue of ‘The Beat’, the monthly magazine of The British Chamber of Commerce in Shanghai.