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Last Updated: Sunday, 20 May 2007, 21:36 GMT 22:36 UK
Banking on China's economic boom
By Steve Schifferes
Globalisation reporter, BBC News, Shanghai, China

Mrs Mao, small investor, Shanghai, China
Mrs Ma: Trading in shares is fun

For Mrs Ma, the stock market is the only way to make money.

A retired civil servant, she has taken to spending her afternoons - like many other Shanghai citizens - in the offices of her stockbroker Shenyin and Wanguo Securities.

The Chinese stock market, based in Shanghai, has risen by 50% this year as a wave of speculative money from small investors has flooded in.

Mrs Ma has invested in two stocks, and hopes that they will soon triple in value - giving her enough money to buy a house for her children.

She has been investing in the stock market from the 1990s, but got disillusioned when she discovered that company bosses were telling lies about their company's performance.

graph of st

But the recent boom in the Shanghai market has brought her back in.

Mrs Ma says that when she started investing in the stock market, her husband did not approve, but now he has changed his mind.

Stockbroker Li Zhao says there has been a wave of new investors who have started trading stocks with her firm in the past few months. Her clients now include students and pensioners as well as businessmen and professionals.

She says that people are responding to the booming Chinese economy, and the opening up of investment opportunities to ordinary people, and interest has been particularly sparked by the huge profits made by IPOs, when companies start trading their shares for the first time on the stock market.

Speculative fever

The stock market boom is not only a sign of the booming economy.

share watching
People flood into stockbrokers' offices during lunch breaks
It is also caused by a lack of other investment opportunities for the public.

As China has moved to a market economy, abandoning the "iron rice bowl" where people were guaranteed housing, health care and pensions by their state-owned company, people have saved more.

But the government strictly regulates the banking sector, setting the interest rate that banks can charge for both depositors and borrowers, and limiting lending.

And without a convertible currency, ordinary citizens cannot invest abroad.

Currently the rate of interest on bank deposits is barely above the rate of inflation.

Banking queues in Shanghai Bank
Banking queues are common in Shanghai
Chinese banks have traditionally catered for the corporate sector, and despite their 600 million customers and trillions of yuan in deposits, service can be poor.

Long queues at branch offices are common in major cities, and the range of services offered is limited.

According to Chinese government sources, the recent boom has meant that the value of shares on the stock market (at $2.2 trillion; 1.1 trillion) now exceeds the value of deposits in China's banks.

Spurring reform

Now, under the terms of its membership of the World Trade Organisation, China is opening up its financial markets to Western firms.

Standard Chartered China CEO Katherine Tsang
Standard's Katherine Tsang: Growth at a dizzying pace

And it is hoping that the increased competition will also improve the quality of banking services

Shanghai's financial district is the centre of foreign banking in China.

And for the first time, Western banks have been allowed set up subsidiaries in China which can accept yuan accounts from Chinese citizens - the first being HSBC, Standard Chartered, Citibank, and Bank of Asia.

Others are also contemplating the same move.

For Standard and Chartered China's chief executive, Katherine Tsang, this is a chance of a lifetime

Ms Tsang, who moved from Hong Kong, says the pace of change in the Chinese banking sector is "dizzying".

In just one year, her business nearly doubled in size as the preparations for the launch of the new bank accelerated.

She admits that in the short term her bank will have difficulty competing with the huge branch networks of the four major Chinese banks, and says they are just "minnows".

Standard chartered branch Shanghai
Western banks plan to expand their branch network in China

But her strategy is to concentrate on the small and medium business sector, which already uses Standard's corporate financing services, and on trying to upgrade their personal accounts, providing a better level of service.

HSBC, one of the world's biggest global banks, is taking a different approach.

It is targeting wealthy clients in Shanghai and other coastal cities, offering wealth management and personalised services to win business among well-off professionals.

But its manager admits that it is still early days.

Although the banks received their license to operate at record speed, they have not yet been given the authority to issue debit cards - vital in China's crowded banking market.

No home addresses

HSBC, which sees China as crucial to its future growth, has a broad-brush strategy.

Ron Logan, chief executive of Bocom Pacific Credit Card business
Ron Logan: The most exciting market in the world
As well as setting up its own bank, it has also gone into joint ventures with Chinese companies to sell insurance and credit cards.

And it has bought a 19.9% stake in the Bank of Communications, China's fifth largest bank.

According to Ron Logan, chief executive of Pacific Credit - the joint credit card venture between HSBC the Bank of Communications, it is a real challenge to build a credit card business in China.

He says that is not just a matter of bringing UK business practice to China - or the fact that there are no credit-rating agencies in China.

He says that the problem is much more fundamental - a basic lack of personal data about banking customers, and a different attitude towards lending.

checking credit card references, HSBC/Bocom Pacific Credit
New jobs: checking credit card references in Shanghai

Many people acquired bank accounts without making an active choice, when their company set up accounts for all their employees at a single bank.

The banks never bothered to check the individual addresses of their customers, who were all registered at their company's address instead.

And many people, when they got loans, considered them to be issued to the whole family, rather than a specific individual, with the obligation to repay.

He cites one family who were furious when the bank checked a mortgage and found that the mortgage-holder had died. They said that as they were continuing to pay the mortgage it was none of the bank's business.

Younger generation

However, Mr Logan says that attitudes towards borrowing are rapidly changing among the younger generation, who are prepared to reveal more details of their income and are not prepared to wait for consumer durables.

Shanghai shoppers enjoy access to Western fashion
Shanghai shoppers want easy access to Western goods

And he says the potential is enormous, with perhaps 300 million middle class people, and only 60 million credit cards.

He is rapidly expanding the business, and hiring more people to do credit card checks on potential clients.

And he is working with a range of data providers, including the police, to provide credit details.

Mr Logan says that, despite the problems, China is the most exciting market in the world.

Government controls

Reform of the financial sector is one of the biggest challenges for the Chinese economy.

A few years ago, some of China's biggest banks had to be bailed out by the government because of bad loans to state-owned companies.

Now, with the consumer boom, banking could play a key role in reallocating resources to domestic consumption and more productive investments.

But with the legacy of instability behind them, it is still not clear how fast the Chinese authorities will move to open up the sector.

But the longer they wait, the more the stresses on the system - and potential imbalances in the stock market - will grow.

This is one of a series of articles on how globalisation is transforming China. Future articles will look at the problems of pollution and migrant labour.

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