As multinational companies (MNC) look to establish and build successful businesses in mainland China, they face a number of hurdles, including understanding local regulations and working with new banking partners. Many will choose to leverage existing partnerships with an international bank to assist in the process of setting up new entities in a foreign territory. But as increasing numbers of MNCs set foot on the mainland, they can learn from other firms' mistakes and avoid the pitfalls.
“Most, if not all, MNCs going into China accept the fact that you need to work with a local bank for their distribution channels and branch networks,” said Tim Fleming, head of corporate treasury sales for Asia-Pacific at Bank of America Merrill Lynch. “On the other hand, they like working with the international banks for their technology and ease of service.”
Fleming highlighted an example of a US-based MNC that wanted to expand in China in 2005 and was looking for an international bank to be responsible for the local bank selection process and implementation stage, and thus effectively manage the entire process alone. The end result was disastrous even though the international bank had selected a local bank in which it had a shareholding. In such cases, it is clear that international banks typically do not have as much leverage over local banks compared to the leverage their clients would have, regardless of the international bank's relationship with the local bank.
“The first thing that many companies learned four or five years ago is that you cannot fully outsource to an international bank,” said Fleming. “They have to be fully involved in the process and establish a triangular relationship with international and local banking partners.”
According to Sam Xu, executive director of treasury services for China at J.P. Morgan, the market has changed. Many companies venturing into China know what to look for and local banks have become more sophisticated as a result. Other companies know exactly which local banking partners they want to work with and will issue separate requests for proposals to international and local banks and then bring both parties together.
However, Fleming believes there is “definitely a difference between the appetites of certain local banks to work with international banks”. Many mid-tier and joint-stock banks are less inclined to work with international banks compared to the big four: Agricultural Bank of China, Bank of China, China Construction Bank and the Industrial and Commercial Bank of China. According to Fleming, the reason why most of China’s mid-tier and joint-stock banks are not willing to partner international banks is because they see themselves are being able to provide an end-to-end service because of their advances in technology.
For an MNC looking to successfully expand their business into China it is important to play more of a leading role when working with both international and local partners. Outsourcing to a single international banking partner is not a disadvantage as long as there is high participation through the selection process and implementation.