Pioneer in Chinese foreign exchange market
By KATHLYN HORIBE
April 27, 2009
BMO, Canada’s oldest bank, is one of the most entrenched Canadian banks in China. Its history there dates back to 1818, the year after the Bank of Montreal’s founding. That was the year its first foreign exchange transaction took place, a transaction that helped the United States finance its growing trade with China. Today, BMO has branches in Beijing, Guangzhou and Hong Kong and a representative office in Shanghai. Of North America’s top 10 banks, BMO ranks 10th and, of all the Canadian banks, its operations are the largest in China.
In order to provide insight on business opportunities for Canadian companies and their international partners in China, ITL interviewed Roger Heng, BMO’s managing director, China. He also holds the position of general manager of the Beijing branch. A graduate of the University of Western Ontario, Mr. Heng, the longest serving foreign banker in China, began his international banking career in 1978 and joined BMO in Beijing nine years later.
ITL: Though BMO’s presence in China dates back to the 1800s, why did it decide to refocus its efforts in the 1980s?
Heng: BMO actually started refocusing its efforts in China in the early 1960s. China was buying a lot of wheat from Canada. A cold war was taking place between the United States and China and Canada was acting as a facilitator between North America and China. Therefore, a lot of the wheat trade was actually conducted through Canada. To facilitate trade, BMO started its formal correspondent banking relationship in 1963 with the Bank of China, the only bank designated at that time to deal with foreign banks.
The Beijing office was set up in 1982 due to two major factors. In the 1970s, China’s focus was not on the economy because of the Cultural Revolution. One factor was that China changed its policy and was allowing foreign investment into the country starting in 1981.The second factor was that China was becoming more transparent and former prime minister Pierre Trudeau had already visited China and established diplomatic relations. He was a good friend of senior leader, Deng Xiaoping, who was the architect of China’s open door policy.
BMO had previously set up an office in Hong Kong as it was the entry port to China. Hong Kong was acting as a watch post for the Chinese economy. At that time, Hong Kong was also used as a platform to survey the economic activities of the Four Dragons – as they were known at that time – Taiwan, Hong Kong, Singapore and Thailand, that era’s booming Asian economies.
ITL: What have been BMO’s major accomplishments in the 1990s? 2000s? Within the last few years?
Heng: In the 1990s, we made a lot of important strategic decisions in China. First we set up our representative office in the south in the city of Guangzhou and then we upgraded that office to a branch covering Southern China. We continued to upgrade our branch in Beijing from a representative office to a branch in 1997. Those were the very early days for allowing a foreign bank in Beijing.
The Chinese economy really started to boom, in my opinion, in 1994, to the degree that in 2001 China was allowed to become a member of the WTO and, from that year on, you see the Chinese asserting their efforts in opening up the banking sector.
In the 2000s, we set up an office in Shanghai. From 2002, our bank in terms of the size, in terms of the spectrum of our products and also our revenue and the growth and the depth of the market was started in this year. BMO also invested in a Chinese mutual fund company, Fullgoal Fund Management of Shanghai, in 2003 and we were becoming one of the leading foreign exchange banks in China. We were appointed market maker for the other major currencies including the local currency, which was a very good head start to our treasury business in China. A market maker is allowed to quote both a buy and a sell price.
In the past few years, we have really built our platform to the degree that it has strategically positioned us for future development, which we are very much looking forward to participating in.
Editor’s note: Guangzhou is located in the Pearl River Delta, a low-lying area where the Pearl River flows into the South China Sea and a major manufacturing centre of China.
ITL: What industries is BMO financing in China?
Heng: Locally we handle a lot of financing of Chinese exporters, which is one of our core businesses. Other industries BMO is financing are energy, transportation and financial institutions, which is the financial services industry. We touch on a variety of industries, depending on the product. We are in trade finance, treasury business, lending and we are also dealing with financial institutions and the big corporations in China. In the 1980s and the 1990s, we were very much focused on our internal lending business to support North American businesses in China. That is our major strategic mandate because we are a Canadian bank that serves the North American client.
Editor’s note: According to PricewaterhouseCooper’s 2007 report on 40 foreign banks in China, trade finance in 2005 represented the most competitive market for foreign banks in China, scaling back to 64 per cent in 2007. The treasury market continues to be underdeveloped, while corporate lending declined from 75 per cent to 60 per cent in 2007.
ITL: How is the economic downturn affecting these industries?
Heng: Because of the slow demand outside of China, the exporting business has been hurting in the past four months. That is a well known fact. The unemployment rate is not really that crystal clear to me. It’s difficult to tell. I consistently receive these messages that the financial crisis over the past eight months has created about 20 million unemployed because of the export industry. If there is a 7 per cent unemployment rate in Canada, everyone would be nervous. But in China the tolerance for unemployment is quite a different picture because the demands of the people are much less. China is basically an agricultural country so the people are very happy when they survive with US$100 per month. There are a lot of entrepreneurs who are selling things on the street and yet they are reporting unemployment at the factories so it is difficult to estimate.
Editor’s note: China’s exports have been decreasing since November and the Financial Times reported China’s exports in February dropped 25.7 per cent.
ITL: When will the economy in China make an upturn?
Heng: First of all, in China it is not (affected by) the leveraging of an economic situation. What is affecting it is the excessive production capacity because of the lack of export traffic so, therefore, that is impacting on an increasing number of unemployed.
If you are in Beijing or in Shanghai or in the inland cities, you will probably feel it’s much quieter in those export high concentration areas. Generally speaking, the economic stimulus package in China is US$650 billion. This package was announced in November and it will take effect very soon to make sure that these infrastructure projects across the country will hopefully absorb these 20 million people that are out of a job.
According to China’s own assessment, in the first half of this year, (the economy) will continue to be in the same situation, and it’s not going to be better off until probably the latter part of this year. This also depends on how the financial crisis is developing outside of China. But all in all, the confidence of the general public is still very high that China can weather this storm and we’re hoping in 2010, 2011 it goes back to normal levels.
Last year, China’s commercial banks’ reserve requirement ratio was 17.5 per cent. They wanted to make sure people didn’t spend too much money because last year China had an inflation issue. Now it’s been lowered by only 1 per cent to 16.5 per cent so the people know that if the country needs money, they can simply lower this reserve ratio by 4 per cent, 3 per cent and the whole country would be flooded with a very high volume of liquidity. Even today liquidity is never an issue in China.
ITL: How does China’s banking system compare with Canada’s?
Heng: Canadian banks operate in a very mature economy with a very stable population and a predictable economic climate. In China, it’s a quickly evolving economic situation and the population is much larger than in Canada. Canada’s population is 36 million compared to China’s 1.2 billion and most of this population is new to the banking system.
Large corporations owned by the state are well funded by the Chinese banks. A recent development is that the government is encouraging people to start up a business and putting up a lot of funding sources to support the banks to direct their lending to small and new businesses.
ITL: What is the major misconception about doing business in China?
Heng: A lot of people think that China is still a very backward country. But in fact by operating here for many years, we see that China is progressing so fast that in a lot of areas they are really catching up – to the degree we can see it still has a lot of power to progress even further.
When doing business in China, it’s not the market that’s an issue, it’s your own internal resources. When China moves, it’s huge and it’s fast. Compared to the West, technically speaking they don’t leverage in China. They never have. They have a lot of cash in the banking system. The financial system in China is not as sophisticated as in the U.S. The regulator and the government do not allow the financial player in China to engage in this kind of leveraging business because they are cautious. And secondly, the currency is not convertible.
Another very different environment between Canada and China is that Canada operates in a mature, well-established legal system. In China, technically speaking they just developed it in the last 20 years. Thousands of pieces of laws and regulations were only created in the past 10 years and it’s evolving as well. So it is exciting in the sense that you see many new windows coming up. But on the reverse side, a newcomer would probably be swamped as it is getting to be quite a sophisticated system.
For a foreigner in China, yes it is rather complicated but it is not as complicated as in the United States or Canada because in Canada you have been working with the same piece of law for many years and you will hire a lawyer, an accountant to do all the work for you so you won’t feel it’s complicated.
In Canada, most of the laws and regulations tell a business what you cannot do within the legal limit. But in China, the law is the other way around. It tells you what you can do. So therefore anything that is not mentioned, you need to get the approval or consent from the authorities to do it. It’s more restrictive in China than in Canada. This would be my interpretation but I’ve seen the development over the years that it is opening up toward the Canadian type of legal system. Of course, Canada has a common law system, not a continental law system like China’s. So therefore it’s more rigid than common law.
ITL: Is there less red tape in China than in Canada?
Heng: China has been improving quite a lot in terms of red tape because they have really opened up the markets and it’s becoming vastly a free market. In China, they have a very high political agenda behind the economic decisions and all government bureaucracy in China has a very demanding mandate from the top leadership that they have to build this country into one of the superpowers of the world. I see every effort that they make toward that mandate so the bureaucracy is terribly efficient. That can be demonstrated by, after China got in the WTO (2001), how many pieces of legislation and the market actions that have been released to make it WTO-friendly. I’m not saying they are 100 per cent WTO-friendly but it’s amazing how a country of this size has moved from ground zero to today. There must be something very forceful behind it otherwise it would not be achieving today the achievements China has made.
ITL: What are the objectives and goals of BMO in China over the next three years?
Heng: China should continue to do the reform of its banking industry and we feel that the currency is probably going toward convertibility. In Canada, it’s a convertible currency.
In China, it’s not. So therefore once China is confident that the economy has strength and power, they will gradually open up the convertibility of the currency. I’m talking about capital accounts, meaning anything related to investment. If you invest money in China and you establish a company or factory and you want to divest it and stop your operation in China, then you need the approval of the state foreign exchange authority to convert your money back to U.S. or Canadian dollars. So far since 1980, there has never been a case rejected. Permission has always been granted but the sanction is there. You need to ask permission. In Canada, you don’t need to.
The Chinese economy is already in very good shape. They were impacted by the export decrease but the return is going to be very powerful.