O'Melveny & Myers LLP and Promontory Financial Group
have co-authored the first detailed analysis of China's
financial system undertaken in the wake of the global financial
crisis. The study has important implications for the
international financial community and policymakers in China, Asia,
the US, and elsewhere.
The paper, "The Financial System in China: Risks and
Opportunities Following the Global Financial Crisis," is
co-written by Susan Krause Bell, a partner at leading financial
services industry consultancy Promontory Financial Group, and
Howard Chao, Asia Practice Group Chair and partner at the
international law firm O'Melveny & Myers LLP. It
examines the unique characteristics of the Chinese banking system
and the government's role in both supervising the banks and
managing systemic risk. It also compares the supervision of
Chinese banks to that of other global banks and considers what the
major risks and opportunities are going forward for the rapidly
evolving Chinese financial sector.
The paper notes that:
Though China's financial sector was relatively
unscathed by the global financial crisis, the system faces serious
short- and long-term challenges. The inconvertibility of
the RMB, protection from foreign competition within China,
conservative regulation, and the overall growth of the Chinese
economy shielded it from many of the problems other countries
encountered. Nonetheless, in the short term, the surge in bank
lending as part of the fiscal stimulus program will likely generate
new non-performing loans and weaken bank balance sheets. Moreover,
rapid change in the form of further financial liberalization,
internationalization of Chinese banks, and the eventual
convertibility of the RMB will bring new risks into the
For the foreseeable future Chinese financial
institutions will continue to dominate the domestic Chinese
financial markets; but profitable niches will exist for
opportunistic international financial firms. Coming out of
the Crisis, international banks will have fewer resources to
compete head to head in the Chinese domestic market against the
large state-controlled Chinese financial institutions. However,
international banks will fare better in areas where they can offer
more innovative and tailored financial services to Chinese
customers. They also may find new opportunities assisting Chinese
corporates as they pursue international expansion plans.
Chinese financial institutions increasingly will become
formidable competitors in international financial markets.
Although they are quite new to the international marketplace, they
have two advantages: (i) strong relationships with their
traditional Chinese customers, and (ii) strong Chinese government
backing. To compete effectively with them, institutions outside
China will have to develop strategies that emphasize the advantages
they hold, including risk-management expertise, international
presence and business connections, and more experience with
innovative, customer-responsive product development.
Ultimately, the predictability of the Chinese
government may be the most important, yet most elusive, aspect of
evaluating the risk of doing business in Chinese financial
markets. The Chinese financial sector will have a better
chance of weathering current and future risks and becoming more
competitive on a global scale if supervisors and firms place more
emphasis on developing sound, market-based practices and the State
moderates its role in controlling innovation and decision-making.
For non-Chinese financial institutions, therefore, the most
important thing is to understand the Chinese system, the role of
the State in the system, and how the State's role could
This paper will have relevance to anyone interested in the
future of the Chinese financial system, including foreign firms
operating, or considering operating, in China, potential investors
in the Chinese financial system, and counterparties to Chinese
financial firms. It should also help Chinese policymakers and
financial firms understand some of the perspectives of the
international financial community.
O'Melveny & Myers LLP routinely provides
advice to clients on complex transactions in which these issues may
arise, including finance, mergers and acquisitions, and licensing
arrangements. If you have any questions about the operation of the
applicable statutory provisions or the case law interpreting these
provisions, please contact any of the attorneys listed on this
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