China has been gradually opening up its banking industry fully to foreign players. Since then, the battlefield has become increasingly crowded and the competition more heated. On top of the aggressive acquisitions made by global players like Citigroup and HSBC, more than a dozen foreign banks have incorporated locally under the new regulatory regime.
One of the latest banks to incorporate locally in China is Société Générale, one of the largest banks in France, which did so in Beijing in mid-September. As a result, Société Générale, which has been operating in China for 27 years, can now take RMB deposits and otherwise develop a full retail banking business in the country.
The global credit crunch that began on Wall Street makes this a daunting time for banks. What impact will the global financial crisis have on China’s banking industry, and what new challenges face foreign banks operating in China? How do bankers view the potential of the Chinese market, and how will they compete with local players? China Knowledge at Wharton spoke with Pascal Sefrin, Deputy Country Manager for Société Générale Corporate & Investment Banking in China and general manager of its Shanghai Branch, to get some answers to these questions.
Pascal Sefrin is a senior banker with more than 20 years’ experience with Société Générale, most of it in the Asia Pacific region (Hong Kong, Taiwan and now Shanghai), and he is also the chairman of the Banking Group for the European Chamber of Commerce in Shanghai.
Below is an edited transcript of the interview.
China Knowledge at Wharton: Société Générale is one of the largest banks in France. How big are you in China?
Sefrin: Yes, our roots are definitely in France where we are a leader in both in retail banking and corporate investment banking services. Yet today, Société Générale is very much a global bank with 151,000 employees around the world, including many here in China. Société Générale has actually had a presence in China since 1981.
We operate out of five cities of Shanghai, Beijing, Guangzhou, Wuhan and Tianjin.
One main area of focus is providing corporate and investment banking solutions to local clients, which are usually state-owned, top-tier companies and leaders in their sectors. This has proved very successful with Société Générale continuing to deliver trusted advice, funding and innovative hedging solutions.
We are also working very closely with Chinese banks and financial institutions at different levels. We work with them on trade finance, on the correspondence banking side, and also from a product angle, which includes selling some product and solutions for their own trade and distribution. So basically, we have four big categories of clients: banks and financial institutions; big Chinese SOEs (state-owned enterprises) and multinational clients.
This last category sees Société Générale work a lot of multinational companies who operate in China. This includes French companies who are developing their business and growing their clients.
Added to that, we’ve also carved out a reputation as a leading asset manager and private bank. Let’s not forget Société Générale’s retail banking operations, which are certainly strong in Europe and are now just getting started in China. We view all these business lines with tremendous potential when it comes to China.
And a further sign of our commitment to China was seen this September when we were awarded an operational license from the China Banking Regulatory Commission. The licence allows Société Générale to accept RMB deposits, paving the way for retail banking. It’s just another step in our ongoing partnership with China.
China Knowledge at Wharton: What strategies help a foreign bank to succeed in China?
Sefrin: Foreign banks have mostly adopted a long-term view with their commitment in the market of China. China remains a competitive market with the strong presence of local banks and so to gain market share in a highly competitive market is not an easy task. You can see from the statistics that local banks have a huge portion of the total market share. That said, it’s hard to compare players like Citibank, HSBC or Standard Chartered with smaller lenders which have a very different strategy and different approach.
For Societe Generale Corporate & Investment Banking, to differentiate ourselves from other foreign players, we adopted a very focused approach in developing our franchise in China. We are not going to be a bank for all custiomers in every location and every segment of the market. We will choose our area of expertise where we are world leaders, namely derivatives and structured finance, and to deliver these solutions to local clients in China.
China Knowledge at Wharton: What’s your experience in working with China’s SOEs?
Sefrin: China has some very big SOEs, which are important clients for Société Générale because they operate in the sector where we can bring value-added products and services. We are working on aircraft finance, shipping and similar areas which are asset-based financing. We’re also a leader in the commodity sector: China is by [necessity] a commodity [importing] country now and it’s naturally eager to source a lot of commodities from around the world in order to fuel its growth. So as a universal bank, Societe Generale is able to help them to find solutions by leveraging off our global capabilities and to help these big Chinese companies reach out to the international markets. This includes overseas acquisitions and finding strategic partners — so we are helping them everywhere in the world, in Africa, in Australia, in Europe and in South Africa. Besides, we provide advisory, financing solutions and hedging solutions to cover their risks in terms of foreign exchange on commodities.
Going forward, China will remain the growth engine for world economy and its role in the international scene will be increasingly important. Even though there will be ups and downs in its economic performance, but still we believe China is a market with enormous potential for foreign banks like Societe Generale.
China Knowledge at Wharton: Which industry sees the most outward-bound investment by Chinese companies?
Sefrin: As mentioned. We’re certainly a leader in commodities including mining, metals energy and natural resources. This is fits perfectly with a lot of Chinese resource companies who are searching for assets abroad for the local industry. They are not only buying, but they are also acquiring and investing. We are working on all the aspects of this — trade finance, acquisition finance, on the advisory side — to help Chinese companies find potential partners in countries where they can actually source. This is an area we are the most active; that’s what China is really looking at. When you look at some other industries, such as Chinese telecom or equipment companies including Hua Wei, we are also there to support these companies as well given our expertise and global reach. Yet much of our focus for China is linked to natural resources, to ensure they can produce capacity to fuel growth.
China Knowledge at Wharton: As a banker who is doing business in China, what really concerns you?
Sefrin: To differentiate ourselves from both local and foreign market practitioners, I would say innovation is the key to our success, and it is one of the core values for Societe Generale Corporate & Investment Banking. In this regard, we constantly bring in innovative financing structures to our mainland clients.
Besides, our international presence allowing us to advise Chinese customers who would like to expand their business in overseas markets. We can help them to find partners and assets in different parts of the world. This is very important because China today is really moving out, in terms of banks as well. Even with the prevailing financial turmoil, there are still plenty of investment opportunities globally for Chinese companies. China may also be more discerning about future investment opportunities and this is why a trusted partner is so critical at times of some uncertainty.
We believe that in order be successful in China’s banking market, you have to be more up-scale in your offerings and well-equipped in terms of expertise and sophistication. We are a global leader in the areas of commodities, derivatives and structure finance – so we know this is certainly were we can add direct value to the Chinese clients today. It’s also essential to have the right people. Banking is a people business — you have to recruit talent locally. It’s not always easy, because China has been a very competitive market (and has a shortage) of trained people, so there is a lot of demand for specialized financial people, which means it’s sometimes difficult to find staff. Still, Société Générale invests heavily in training, which is one reason why we are able to retain our employees and set high standards.
Lots of big foreign banks have invested heavily in recent years in China and many became incorporated recently, including Société Générale in September, which ultimately means the hiring of many more people. So it’s natural that today there is a scarcity of certain functional expertise in the market, compared with the way we would like to operate. So, we will need more people in capital markets, assets management, legal compliance, etc. This is putting pressure on wages while retention can be an issue if the bank does not develop the banker’s career in-line with their expectations. So to hire and keeping good staff is the probably one of the biggest challenges we face today as a foreign bank.
China Knowledge at Wharton: So now there is a lot of competition between foreign banks in China?
Sefrin: Competition is found in every important market of the world. What makes a difference is the value your can add to customers – not necessarily just gaining market share. And while Société Générale operates across all banking lines, very few global banks could compete with our platform of derivatives, structure finance and commodities. We are leaders in these areas and local clients are increasingly realizing how we can add value. Interestingly, clients today understand that a big, global bank which offers “all things to all people” may not be the best fit to their specialized needs. Our initial success in China has been built on delivering tailored solutions in certain areas of banking.
We are continuing to expand our presence in China and expect to considerable grow our headcount from current levels of 280 personnel. Part of this will come from natural demand for our offering and the remainder from expansion of Société Générale’s banking franchise in China.
China Knowledge at Wharton: In addition to the highly competitive talent war, what other challenges do you have?
Sefrin: Operating in a market which is still developing a regulatory framework remains an interesting challenge. We are patient and believe that China is taking the right steps towards market liberalization. Recent global events have also shown that it is prudent to be patient. That is why we are working with authorities to share our expertise which has been built up over decades. This is not an exercise which delivers more business. It does, however, allow Société Générale to provide input into an exciting and important market.
Access to markets has also been an issue. Again, we realize that China needs to develop a financial market at its own speed. China signed the WTO [agreement] in 2001 to create an equal footing for foreign banks and local banks. This may be taking some time to realize, however, Société Générale is ready to further participant as the market continues to open.
China Knowledge at Wharton: Do you do business with small or mid-size private companies?
Sefrin: As we look forward, I think private companies will take a bigger share in the Chinese economy. So far, we haven’t worked with many private companies. That’s mainly because we are really focused on the big market leaders in their sectors. This includes those in shipping, aircraft finance and commodities where we have some value-added services and products to deliver: that’s what we have done. But for private companies, banks need to show caution. Still, the small private companies of today can develop into the leaders of tomorrow with the right partner.
China Knowledge at Wharton: Are Chinese banks operating more efficiently today?
Sefrin: Chinese banks have made a lot of progress, especially Bank of China, ICBC [Industrial and Commercial Bank of China, the biggest bank in China]. They are being recapitalized and publically listed, they have corporate governance which is well in place and there are some foreign investors in those banks. Basically, yes, they have a new look and new approach, so it’s different from the past. Of cour
