Introduction

Publisher Summary

This chapter explains that the rapid international growth of banks has aroused a growing interest in the academic field, with particular regard as to how this came to be. China has boasted the fourth largest economy in the world since 1992. However, China's banking sector remains monopolised by state-owned banks with a historical responsibility for supporting state-owned enterprises and maintaining social and economic stability and security. Although foreign banks have been allowed to apply to establish branches and to operate in China since 1985, they have generally lacked trust and support from the Chinese government. The Chinese government adopted a restrictive policy toward them, in order to protect the state-owned banks and to restrict the competition. Among the foreign banks, the four banks that remained in China after 1949, i.e. the Hong Kong and Shanghai Banking Corporation (HSBC), the Standard Chartered Bank, the Overseas Chinese Bank, and the Bank of East Asia, received government support to develop their network of branches and business.

The rapid international growth of banks has aroused a growing interest in the academic field, with particular regard as to how this came to be. China has boasted the fourth largest economy in the world since 1992.1 However, China's banking sector remains monopolised by state-owned banks with an historical responsibility for supporting state-owned enterprises and maintaining social and economic stability and security.2 Although foreign banks have been allowed to apply to establish branches and to operate in China since 1985, they have generally lacked trust and support from the Chinese government. The Chinese government adopted a restrictive policy towards them, in order to protect the state-owned banks and to restrict the competition.3 Among the foreign banks, the four banks that remained in China after 1949, i.e. the Hong Kong and Shanghai Banking Corporation (HSBC), the Standard Chartered Bank, the Overseas Chinese Bank and the Bank of East Asia, received government support to develop their network of branches and business.4 These banks have gradually grown to become the main foreign banks in China.5 The four banks' development implies that there is a relationship between their rise and the Chinese government's trust and support. Compared with other foreign banks, these four banks appeared to enjoy a competitive advantage with respect to establishing branches or expanding their business. Foreign banks in China seem to have accepted that the Chinese government's trust and support is important to their long-term profits.6 It is therefore imperative that a detailed study be carried out regarding the relationship between the government and the rise of foreign banks in China. This is the justification for this study.

Foreign banking has a long history, with the earliest foreign banking beginning in the fourteenth century, when the merchant banking houses of the city states, such as the Medici Bank, began to establish branches, subsidiaries and representative offices across Europe. In the nineteenth century, European banks showed a great interest in foreign banking and thus opened their own branches and subsidiaries in overseas markets. Among these, British banks were dominant in foreign banking until the 1960s.

Foreign banking by British banks began in the 1830s, when they started to establish offices and businesses in Australia, Canada, the West Indies and in the Mediterranean area. Following this, they developed modern banking around the world.7 These overseas branches and subsidiaries concentrated mainly on the developing countries in the southern hemisphere and Asia, rather than on the USA and other European countries. These early foreign banks focused on foreign trade finance and foreign exchange operations. They helped foreign governments to raise loans in London, which was the leading financial centre in Europe and they also engaged in foreign investments. They were, in addition, active in lending from their own resources, in order to support their own governments. Much of this lending, especially during the First World War, was 'imperial and colonial in nature'.8

While foreign banking has a long history, it is only since the 1960s that foreign banks have experienced significant development.9 This is clearly shown by the dramatic overseas growth of US and Japanese banks.10 The scope of business of these banks has also expanded and in addition to trade finance and foreign exchange operations, they have begun to engage in both retail international banking and wholesale international banking.11 International banking business has become an important component of banking and an important source of earnings.12 In terms of distribution, these foreign banks mainly concentrate on developed countries with 'offshore' financial centres. These locations usually offer preferential or flexible facilities and a business environment that includes preferential legal regulations in relation to exchange control and tax payment.13 By the end of 1981, more than 75 per cent of banks' overseas offices were in developed countries, such as the USA, European countries and Japan.14

More recently, the increase in the developing countries' share in world foreign direct investment (FDI) and government deregulation policy, has led foreign banks to consider more closely these emerging markets. Since the mid-1980s, foreign banks' activities in the emerging markets have grown, on average, by double or even triple digit rates in all areas of the world, leading to a sizable market share for foreign banks. In regions such as South America, foreign banks held approximately 20 per cent of banking market assets by 1999.15

China has experienced great economic growth since 1978, when the government engaged in economic reforms based on an open market economy. Between 1978 and 2000, China's GDP had an annual growth rate of 9 per cent, while manufacturing output rose by 14 per cent per year.16 China began to attract FDI in 1979, and since 1993 China has been the second largest recipient of FDI in the world, after the USA.17 In 1994, China received approximately 14 per cent of the world FDI. Foreign banks in China also experienced considerable growth.18 At the beginning of the reform period in 1978, only four foreign banks from three countries operated in two cities in China. By the end of 2004, there were 68 foreign banks from 18 countries, with 171 branches distributed throughout 21 cities in China.

In the history of Chinese banking, HSBC, as the largest and leading foreign bank in China, retains a unique position. It was established in 1865 in Hong Kong, under the name of the Hong Kong and Shanghai Banking Company, with the aim of combining banking with the substantial business opportunities in trade and shipping between Hong Kong and Shanghai. Two years later, the word 'company' in the bank's name was replaced by the word 'corporation'.19 It not only offered an exchange service but also served the needs of the local Chinese community and assisted the Chinese government in its plans to reform the currency and finance public services.20 Before 1949, HSBC had worked closely with the previous Chinese government. HSBC was the Chinese governments' (Qing Dynasty and Republic of China) financial agent and manager. It was the leading bank for the Qing government's loans to finance railways, dyke repairs, mines and administrative reform.21 It virtually monopolised China's public loans between 1874 and 1895 (see Table 1.1). The majority of major loans and the majority of China's business were transacted by HSBC.22

Table 1.1

Public loans by foreign banks, 1874-1895

Source: HSBC Group Archives, Archive reference HSBC G002/003, HSBC, King, D. (1983) 'China's Early Loans, 1874-1895, and the Role of The Hongkong and Shanghai Banking Corporation', Research Report in the Hongkong Banks Group Archives, Hong Kong.

Between 1911 and the 1930s, HSBC took custody of China's customs revenue until the establishment of the Central Bank of China. Finally, its Shanghai manager assisted in the protection of the Chinese currency, at the request of the Minister of Finance. As a result, business with China was the main source of profit for HSBC and its financial destiny was closely linked to the country.23 It also had a major presence in China, with approximately one-third of its...