ANZ's new head of China maps the changing terrain

China's financial system is radically different to when Huang Xiaoguang returned to Shanghai with an MBA won through an UN-sponsored scholarship in Europe in 1988. The native-born Shanghainese Huang tells not to discount the capacity for China to innovate but not to expect any reform to come without thorough testing of the waters.

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This interview is also available in Simplified Chinese.

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In a financial services career spanning two decades and four banks – ABN AMRO, Citigroup, Bank of America Merrill Lynch and now ANZ – Huang has earned a reputation as an analytical and thoughtful banker. He shares his thoughts on growth and financial market reform in the world's second biggest economy with BlueNotes' contributing author Ayesha de Kretser.

"If you compare banks in China to the banks in America… banks in China have actually jumped to a different stage if we’re talking about technology implementation."
Huang Xiaoguang, CEO China ANZ

Ayesha (AdeK): We hear a lot about how China lacks capacity to innovate and develop, that its banking system is underdeveloped. As someone who has been closely involved in the industry, what changes do you see?

Huang Xiaoguang (HXG): Actually the market has developed a lot and probably people from the rest of the world are not aware of this. Back in 1998 when I joined Citi in China, there was really only one product and that was a standby LC (Letter of Credit). International banks at that time could really only issue a SBLC to a Chinese bank which gave a multinational company a loan and nothing else.

But when China became a WTO member [at the end of 2001], things started changing quickly. Since then many new products have been developed. For example, now we have more options in cash products in terms of pooling, in terms of shared service centres, in terms of cross-border pooling. All of these are innovations by both Chinese and foreign banks.

When we talk about new technology in traditional banking services, Chinese banks are the best across the world in some regards - because they're late-comers in the market and they're able to buy and implement all the most advanced technology.

If you compare banks in China to the banks in America, who are still using cheques, paper money and lockbox, banks in China have actually jumped to a different stage if we're talking about technology implementation. We have all adopted e-based technology in China – internet, mobile and so on. Many consumers are using smart phone-based payments and internet banking services. These are all innovations.

On the other hand, a couple of areas still clearly require further innovation and need to become more open. One of them is the markets business given the RMB is not convertible. As a result, China does not have well-developed onshore debt and equity capital markets. The Chinese market should catch up in this area - like developed countries - going forward. With the opening-up of the Chinese financial market, I think if one day the RMB becomes convertible, there will be a huge opportunity in the markets space for all banks.

AdeK: Everyone in Australia is talking about commodity prices plummeting and Chinese steel production growth actually looks like it's down for the first time in decades. Can you talk about the implications?

HXG: I think not only are commodity prices down but the Chinese economy is slowing down too because of a number of complex reasons. For example, the US economy is just recovering while Europe is not doing that well. Therefore Chinese exports continue to face difficulties. Today, it is time for China to restructure its economy. Part of this will involve opening up a “New Silk Road" which will cover China, Asia Pacific and Europe. My view on this new initiative is that the government would like to start encouraging the export of capital. You will also probably see China exporting some of the industries it has built up, which means transferring them from China to other developing countries. If that strategy can be successfully implemented, everyone in the Asia Pacific Region will benefit.

Countries where China transfers its capital to build up industry will eventually have much stronger requirements for commodity imports, from places like Australia and New Zealand. New Zealand will also benefit from this.

AdeK: One of the things ANZ has talked about during the past is its partnerships with Chinese banks. Having worked in foreign banks for so long, can you talk about how these relationships have evolved over time?

HXG: Back in my time at Citibank, I helped Citi to invest in the Shanghai Pudong Development Bank and created the first credit card joint venture and we also invested the Guangdong Development Bank separately. I was the one of the key negotiators for those investments by Citi. My past experience was all within global banks which have typical global corporate and investment banking platforms and work with multinational customers from America, Europe and China.

I think one of the reasons the Chinese government would like to introduce foreign investment in local banks is the government would like to modernise the banking system by introducing new management skill, new capabilities and new ways of doing business. They welcome a certain level of competition but they don't want to jeopardise the banking environment. Healthy competition is good for both international and Chinese banks.

The Chinese banks would like to learn new skills but they don't want to be controlled by foreign banks.

From an international bank's point of view, by doing business with or investing in Chinese banks, foreign banks get to understand the Chinese market better, they have the chance to access a much broader client base and to understand those clients' risk, business needs and credit profiles better. By working with Chinese partners, foreign banks can save a lot of costs. There's no need to build a large branch network, for example, because you can leverage that of your partner. It's a very mutually beneficial relationship.

But I think the mistake some foreign banks made in the past was they didn't position themselves well. They came in thinking they could take control of Chinese banks when the market really wasn't at the stage where it could allow such a thing to happen. This probably compromised a lot of relationships because once the foreign partner's takeover aspirations were revealed, the walls went up and the Chinese bank would no longer be open to the mutual learning process. Once the trust was gone, it went from being win: win to lose: lose pretty quickly.

The time for foreign banks to take control has not come yet from my personal perspective. At this particular time, it is better for both sides to jointly develop products, exchange management experience, and help each other in customer services in respective markets which will be beneficial for both parties. When the market is open to certain level, there might be a possibility that one day the government will open the market for foreign banks to take control of some of the small Chinese banks but it's still too early to talk about it.

AdeK: Do you think China is becoming more nuanced in how it positions foreign investment as being necessary for building economic prosperity, rather than exporting industry to alleviate pressure and overcapacity?

HXG: The Chinese government would like to upgrade its industry, to drive more innovation and efficiency in order to support economic growth. With the rise of the living standards and labour cost and ageing population, some high labour-intensive industry might be moved out of China. What was happening to China 30 years ago will happen in other developing countries across Asia and Africa, it is part of the cycle.

AdeK: In the US and in Europe, there is always a fear of China's slowing down when they talk about investing not only in China but Australia too, given the interwoven nature of these countries' fortunes.

HXG: Before I joined ANZ, I visited the US and Europe twice a year and whenever I spoke with senior executives of multi-national corporations (MNC), none of them were changing their investment plans in China. At the end of the day, the growth is still there in China and the currency is still among the most stable currencies in the world. China remains one of the largest foreign direct investment receivers and I think the US and Europe will keep investing in China because China is still one of the fastest growing economies in the world with a stable political environment and good annual GDP growth.

AdeK: Coming into ANZ, what does this mean for this bank?

HXG: I believe ANZ will be active in facilitating our clients in doing business in the region; we have a role to play in Asia Pacific as we have strong networks in the region. Before this interview, I was talking to a client, a Chinese company who has a regional ambition in the textile business. They're going to have a big investment in Vietnam and they're going to buy technology in Taiwan. So we connect them with our Taiwan team to help them find the target company to acquire and also connect them with our Vietnam team to help with their operations. I do think that with the increasing number of Chinese companies going abroad, for example within the Asia Pacific region, this trend will bring a lot of opportunities for ANZ China. Meanwhile, ANZ can help our MNC clients do business in China too.

AdeK: ANZ recently issued the first Basel III compliant debt in Hong Kong, is further growth in Chinese bonds still contingent on this RMB convertibility?

HXG: Yes, part of the RMB internationalisation is to encourage international individuals and institutions to hold RMB in overseas markets. To achieve that goal, we need to make sure the investors can invest in RMB and make money overseas. Today, this motivation is not that strong because China has not produced a long-term yield curve in the RMB bond market. This means institutions like us cannot develop investment products/derivatives along that interest rate yield curve. Then people or institutions don't have an incentive to hold RMB outside of China as the money cannot be used for investment.

The Dim Sum bond market (debt raised in RMB outside of China) is the way to develop that yield curve . Hong Kong is the right place for China to do the experiment but the tenor is relatively short. We need to develop long–term corporate bonds of 10 year, 15 year and even 20 year tenors. When that happens, institutions can develop investment products along the yield curve.

AdeK: Does China have plans to develop the onshore bond market for corporates?

HXG: The onshore market is another way to develop the yield curve. Although companies in China are allowed to issue bonds the process is very complicated - which is an area we could look to reform. If you want to do any reform in China, it always requires a lot of work considering the scale of the country. That is why China always does a lot of thorough experiments. Once the experiment is successful, the government will replicate the successful practice. Hong Kong is the right place for China to do this.

AdeK: Do you think Chinese companies understand and appreciate ANZ's footprint across the Asia Pacific Region?

HXG: Certainly more and more customers understand and appreciate our footprint across the region. But, we still need to do more education to help our customers to understand our capability across our network. For the last 30 years, as China was essentially only an FDI receiver, many people have been very inward-looking and very domestic-focused; this concept of exporting capital is new for them. It is the right time for us to support Chinese companies with Asian ambitions.

I'm happy to join ANZ because it has a unique opportunity and role to play in China's economic development process and I believe ANZ will play a very important role across Asia Pacific more broadly.

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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