Potential Strategies for HSBCS Entry into Chinas Rural Banking Sector

TABLE OF CONTENTS

1. INTRODUCTION ............................................................... 1

2. FOREIGN BANKS INVESTMENT OPPORTUNITIES IN RURAL CHINA

.......................................................................................... 2
3.EXISTING PROBLEMS FOR HSBC IN CHINA ........................ 3

3.1 LIMITATIONS IN FARMING LENDING .................................................................. 3

3.2RURAL BANKING LACK OF TALENTED PERSONS AND IT INFRASTRUCTURE 3

4. POTENTIAL STRATEGIES FOR HSBC ................................. 4

4.1 DEVELOPING TAILORED LENDING PRODUCTS .............................................. 4

4.1.1 Loans for enterprises and farmers ............................................... 6-5

4.1.2 Individual lending..................................................................................... 7

4.2 CULTIVATING TALENTED EMPLOYEES ............................................................. 6

4.3 IMPROVING IT INFRASTRUCTURE .................................................................... 8

5. EVALUATION OF STRATEGIES .......................................... 7

6. CONCLUSION .................................................................. 8

BIBLIOGRAPHY.............................................................. 9-10

1. Introduction
Compared to the deterioration of America and Europe economic situation due to the financial crisis in 2008, Chinas domestic demand has grown dramatically in recent times. China has replaced Japan as the secondary largest economy so multinational companies are fighting to enter Chinas market to obtain the dominant position. According to Yung (2011), in retail banking, foreign lenders are optimistic about China since the investment industry of Chinese market has remained open for them. Furthermore, farming is the main industry of China, with a vast rural population, but most foreign lenders focus on the big cities of China, ignoring the rural provinces. This could be the next emerging and developing financial markets. Indeed, HSBC, who has the biggest branch network and 162 outlets on the mainland, was the first multinational bank to take part in Chinas rural monetary innovation in 2007 (The Economist, 2011). It has already gone ahead to expand rural banking network in China. Although even the Chinese rural financial market apparently shows great potential, there are still many challenges. Providing tailored financial products to satisfy the demands of Chinas rural areas is the solution to these challenges. This project will first demonstrate the problems in HSBCs entering the provinces of China. It will then determine which strategies could meet these needs in rural districts. The last part of the paper will evaluate which strategies could be an optimum response.

2. Foreign banks investment opportunities in rural China

In order to resolve the unemployment of 20 million migrant laborers who are

from remote districts, the Chinese authorities urgently need more funds to build rural villages to stimulate these areas economic growth. Therefore, the Chinese government intends to extend the amount of provincial banks over ten times to 1,027 by 2011 (Kwok, 2009). In addition, according to Dowling (2010), because Chinas state has searched to increase the domestic expenditure and lower dependence on exports for economic growth, it has established a succession of rural financial programs in recent times to build public works and industrial investment of underdeveloped regions. Apart from all of the above, some analysts conclude that, multinational banks could be targeting at remote areas since it was difficult for them to vie with Chinas domestic banks in urban (Xinhua News Agency, 2009). As a result, foreign banks could focus toward on Chinese rural market that national banks had principally forsaken.

3.Existing Problems for HSBC in China

3.1 Limitations in farming lending As Qiang, et al. (2009) claim, under communist laws, people do not have land-ownership because cropland is corporately held and can only be used for agriculture. This may be the main impediment to develop agricultural lending

since farmers cannot pledge their grounds to exchange loans. Farmers, with only small number property besides agricultural implements and farm animals, have usually failed to acquire bank lending. This is a problem for HSBC because based on the above reasons that farming loans could be a dangerous and risky undertaking. 3.2Rural Banking Lack of Talented Persons and IT infrastructure Developing rural banking may also have a big challenge, which is lack of adequate talented people and experienced employees in remote districts (CNC World, 2011). Due to fewer opportunities in rural China, most talented persons choose to migrate to big cities to find better employment. It causes foreign banks which are opening outlets in countryside to miss qualified employees. Moreover, rural areas also lack advanced technology in banking infrastructure and system.

4. Potential Strategies for HSBC

HSBC has been strengthening its rural branches in the west of China, in the middle, northern and eastern regions, with providing tailored lending products to match the demands of rural enterprises and residents, who were viewed as harder to obtain lending and credits than urban citizens (Business China, 2010).

4.1 Developing tailored lending products Based on Chinese law, Chinese people is generally difficult to apply for any loans since they cannot own any land; therefore, Chinese domestic banks have not been attracted to needy rural districts. However, HSBC has tried to satisfy the lending needs of China's rural provinces by tailored financial products, offering loan services to local businesses and farmers according to their cash-flow analysis and the estimation of borrowers' repayment capability (Xinhua News Agency, 2009). HSBCs strategies support rural firms and farmers, who may lack mortgage to access loan opportunities, to settle their financial problems. Furthermore, the supply chain in rural industry is generally unstable and weakness and this factor increase the lending risks for banks so HSBCs rural banks should play the role to intensify the collaboration of supply chain in local enterprises, which have long-term relationships with clients. 4.1.1 Loans for enterprises and farmers Advancing the farmers or suppliers loans, HSBC could face a limitation which is that loans to steadier industries in civic areas are securer than in the rural sector. Firstly, the quantity of trade of local enterprises has often been limited by farmers who are not being able to raise their manufacture size and quality of produces. Therefore, HSBC has to develop financial services which are suitable for reaping cycles and supply chain to sustain agricultural loan. Secondly, to stabilize the demands and supply relationship of farmers and local business, HSBC should help them to establish a long term and creditworthy supply chain. For example, HSBC could offer farmers revolving fund immediately and it would then enhance the output of farming production

and stimulate the yielding supply to local enterprises. 4.1.2 Individual lending Chinas domestic banks, generally, prefer to provide lending to good-sized enterprises than to small enterprises or personal customers. Furthermore, under Chinese laws, smaller companies and farmers have no property to access financial support. Zhao (2010) observes that, compared to developed east part of China, where farmers can obtain lending by valuable and large agricultural tools such as tractors, poor western rural areas are more difficult for farmers to access financial support. Before foreign banks develop rural financial market, people usually access financing support from relatives or friends. To resolve this problem, HSBC needs to not only design a specific lending product for rural China, but also loosen lending condition and widen guarantors range.

4.2 Cultivating talented employees There are various problems in rural banking, including shortage of talented people and specialized technology, and IT infrastructure not tailored to Chinese rural banking (Stiles, 2009). To overcome these challenges, HSBC should increase training provincial branches and embed HSBC culture and systems in local employees, and also start professional management courses to cultivate managerial talent. However, most talented people would acquire more opportunities in cities and the life there is more attractive than countryside (Fan, 2003), so HSBC may not find sufficient talent in rural areas. HSBC has to provide much higher salary and more promotion chances for these talented people to reverse this situation.

4.3 Improving IT infrastructure In terms of IT infrastructure problems, to quote Stiles (2009:7), HSBC has already standardized procedure across all rural business extension to lower cost, increase operational efficiency, manage fast business growth and ensure robust risk management and control.Moreover, there are some other essential strategies for HSBC such as improving IT infrastructure to support Chinese language, rural management ability and taking more rigid controls to manage the banking business and loan risks.

5. Evaluation of strategies
The above analysis shows that China rural areas urgently need significant numbers of capital, as HSBC launches tailored lending services to meet local industry demands. Those products must be attractive and widely applied. As for cultivating talented employees, it could help HSBC to rapidly expand its business range. Altering operation style and improving IT infrastructure can make HSBC operate its business efficiently and effectively. All the above solutions are important and essential for HSBCs entry into rural China; nonetheless, the most crucial solution should be the tailored lending service because the main revenue of rural banks is from the interest of loans. In contrast to the advantage of lending business, HSBC has to tolerate the loans risks and low return rate at the initial stage. As the information mentioned in

section 4.1.2, by preventing the damage from lending business, the best strategy for HSBC is to confirm customers cash flow and their repayment ability because most farming lending is not based on mortgage.

6. Conclusion
The development of China's provincial banking market shows not only opportunities but also challenges. However, based on the considerable growth of agricultural debit market, HSBC is still confident of success to develop the rural banking market in China. In order to operate rural business well, HSBCs rural banks should offer a pliable pledge process, more suitable and approachable contrast to other banks. In addition, HSBC need to offer a tailored loan service to support the demands of farmers and small firms in the countryside. It is obvious if any multinational company attempts to enter the other countrys market, it has to adjust itself to local needs. To overtake local banks, HSBC should keep launching new branches, providing reformed services, altering the strategies and management style to fit the market situations and reinforcing its brand.

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