China Welcomes More 2nd-Tier Financiers 中国欢迎更多二级金融机构
What I like to call the “second wave” of overseas financial institutions coming to China is picking up momentum, with announcements of new expansions in the market by relatively unknown players CIT Group (NYSE: CIT) and MoneyGram (NYSE: MGI). I’ll discuss what each of these companies does shortly, as neither enjoys the widespread recognition of much bigger names like Citigroup (NYSE: C) and HSBC (HKEx: 5; London: HSBA) that have been active in China for more than a decade now despite making only limited inroads during that time.
What’s interesting about this new wave of smaller, more specialized institutions is that they seem to be finding success where the bigger global banks have failed by focusing on niche areas. In this case, these smaller foreign firms are providing money and financial services for private small- to medium-sized businesses and consumers — 2 areas where China’s existing big state lenders lack experience and expertise. What’s more, this second wave of overseas financial firms are actually receiving a warm welcome from Beijing, which recognizes their services are desperately needed in the market and is thus approving many of their new initiatives in record time.
Let’s take a quick look at the details behind the latest new developments from CIT, a financing specialist for small and medium-sized businesses, and MoneyGram, whose network allows consumers and businesses to transfer money to thousands of locations both inside and outside China.
CIT announced that it has made 2.2 billion yuan, or about $345 million, in new funds available for its China arm to lend to small- and medium-sized domestic companies. (company announcement) The new funds more than double an initial 1.8 billion yuan that CIT made available for lending in China when it entered the market last year. Equally significant, CIT is working with a number of Chinese partners to set up the program and lend out the money, including major names like Agricultural Bank of China (HKEx: 1288; Shanghai: 601288) and Bank of Communications (HKEx: 3328; Shanghai: 601328), as well as regional players Bank of Beijing and China Merchants Bank (HKEx: 3968).
Meantime, MoneyGram said it has signed a deal that will allow it to offer its money transferring services at 132 branches of Guangfa Bank in south China’s Guangdong province. (company announcement) The agreement builds on a series of similar tie-ups between MoneyGram and other Chinese banks, extending the US company’s services to more than 14,000 locations throughout China.
These latest 2 agreements follow another major announcement that saw Silicon Valley Bank, a mid-sized US lender, this summer officially open a Shanghai joint venture with Pudong Development Bank (Shanghai: 600000) after getting unexpectedly fast approval from Beijing. (previous post) Like CIT Group and MoneyGram, Silicon Valley Bank set up its venture to specifically target a niche area of private sector companies, in this case high-tech firms similar to the ones that have become SVG’s core customers in the US.
Clearly Beijing realizes that these kinds of smaller, niche-oriented foreign financial firms offer a valuable service by providing funds to the private sector — services that its own companies lack. That gap was on prominent display earlier this year when a sharp business slowdown in the city of Wenzhou exposed a huge underground lending network that had sprung up over the last decade to serve a vibrant private sector that couldn’t get funding from traditional state-run banks.
To fill the gap with more reliable and affordable funding for these more entrepreneurial companies, Beijing has ordered its domestic banks to work with foreign niche specialists to learn how to broaden beyond their traditional expertise in lending to big state-run firms. From my perspective, Beijing’s latest drive to attract these kinds of foreign specialty financial firms looks like a smart strategy to support a private sector that is becoming increasingly important to China’s economy. Accordingly, look for more such moves by smaller foreign financial services firms into China over the next few years, providing some exciting and interesting growth opportunities for those companies.
Bottom line: The latest expansions by CIT Group and MoneyGram in China reflect Beijing’s desire to bring in more foreign financial firms with experience serving consumers and private businesses.
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