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Background

Since foreign capital banks saw a decrease in new loans and a sharp drop in profits last year, they have been actively expanding loans and deposits while watching China's financial market trends and environmental changes
In 2009, China achieved 9.1% of high economic growth rate based on its sufficient liquidity. However, as the government returned to tight monetary policy to reduce liquidity in 2010, its financial market environments have deteriorated
In addition, the Chinese financial authority is working on RMB settlement for foreign trade, expansion of market opening and inducement of foreign capital investment while it is changing policy and systematic environments by decreasing foreign borrowing ceiling, strengthening supervision over foreign exchange management and increasing minimum wage
This second report, followed by the 'Review on Management Environments of Foreign
Capital banks in China (1): Foreign capital banks' advance into China and changes and characteristics of management environment in 2009,' introduces impacts and implications of China's financial market trends and changes in policy and systematic environments on foreign capital banks

Changes in China's Financial Market Environments in 2010

A slowdown in currency supply growth rate

As the government has implemented policies to absorb liquidity and control real estate prices in 1H, currency growth rate has clearly slowed down. M0 growth rate remains unchanged and growth of M1 and M2 has continuously slowed down. As a result, difference has been narrowed, contributing to a gradual decrease in currency liquidity

A slowdown in savings growth rate and loan growth rate and negative growth rate
of foreign currency loans

Savings growth rate has sharply dropped this year. While household savings growth rate has slightly increased since June, corporate savings growth rate has sharply decreased. In July, corporate savings growth rate was below household savings growth rate
Loan growth rate has also continuously dropped, but remained unchanged in April and July. Short-term household loan ratio and mid to long-term corporate loan ratio have increased. Company's performance of new loans on bills and foreign currency loans recorded a negative growth, worsening a lack of foreign currency

An increase in new loans of foreign capital banks and a slight increase in loan interest rates

Mid to long-term loans focused on SOC, real estate and manufacturing business in 1H. Loan growth rate relating to agriculture and SMEs was high and new loans of agricultural joint banks and foreign capital banks have increased
As the Chinese government has implemented loan control policies to absorb liquidity, a slowdown in loan growth rates has continued. In the meantime, loan interest rates have slightly increased and interest rates of foreign currency savings and loans have increased

A drop in loan demand in the inter-bank money market and a slowdown in interest
rates

While net loan funds of state-run commercial banks have significantly dropped in the inter-bank money market due to tight monetary policy, net loan funds of other commercial banks have sharply increased. Net loans of foreign capital banks have decreased
Interest rates in the money market reached a record high in February, had stably slowed down and sharply increased again in the middle of May. However, they have dropped again since July. In particular, short-term interest rates have sharply dropped

Major Changes in Financial Environments and Impacts from a perspective of policy and system

RMB as a settlement currency for trade in broader regions

As China pursues to popularize RMB in global trade, it has expanded a pilot RMB settlement service regions to 20 provinces, Republic of Korea, Japan and ASEAN. As of the end of June, the RMB settlement amount reached 70.6 billion yuan. 13 foreign capital banks including Woori Bank authorized the use of RMB as a settlement currency
Although income from foreign currency exchange fees has fallen with trade settlement
in RMB, new opportunities such as RMB savings resulting from opening of settlement accounts and account balance and corporate financing and trade financing for exporters have been provided

Foreign capital banks are authorized to issue RMB corporate bonds

As foreign capital banks have been allowed to invest in the corporate bond market, the
capital market will be gradually open to more nations in the world by allowing them to
issue corporate bonds and mid-term notes and list them on the stock market, which will have a positive impact on foreign capital banks' RMB financing
In particular, foreign capital banks with high dependence on borrowings from their parent banks will benefit from expanded local financing opportunities, contributing to RMB capital increase. However, as their main client, foreign capital companies will be financed in person, foreign capital banks are required to diversify sales strategies

Strengthening inducement of foreign investment

The Chinese government relaxed investment regulations on foreign capital banks this year while stepping up efforts to encourage foreign capital banks to make investment in high value added industries and central-west areas. As a result, more foreign capital banks advanced into central west areas this year
Korea's direct investment in China recorded a positive growth rate in June and more companies with capital power and technical power have made investment in China.
Accordingly, foreign capital banks are required to strengthen RM and research functions to provide special services like investment advisory

Strengthening control over inflow of hot money

Since foreign capital banks' reduction of foreign borrowing ceiling and strengthened regulations on short-term foreign borrowing and current transactions will add financing difficulties, they are required to secure funds by expanding deposit
A rise in workers' salaries
27 provinces in China saw 37% of minimum wage growth and 20 provinces more than 20% this year. A state-led wage rise for workers and a decrease in those who newly enter into the labor market are likely to continuously raise salaries and worsen labor conflicts
Low wage based export manufacturers are required to strengthen credit management. In the mean time, a increase in loan demand resulting from capital re-investment and household savings from a wage rise and worse profits of foreign capital banks resulting from an increase in wage costs have been emerged as an issue

Conclusion and Implications

China's economic growth rate in 2Q (10.3%) has slowed down and M2 growth rate also continuously slowed down. Under such circumstances, a slowdown in grow rates of savings and loans and lack of foreign currency have added financing difficulties for foreign capital banks and have worsened sales environments
However, as concerns over a continued slowdown in economic growth for 2H have been raised and there is a signal of tight monetary relaxation , tight monetary policy is likely to be relaxed in 2H compared to 1H. Accordingly, foreign capital banks are expected to expand loans, but there is a concern over an NPL increase
In addition, the Chinese financial authority will expand RMB trade settlement and allow foreign capital companies to issue RMB corporate bonds to popularize RMB in global trade while stepping up efforts to induce foreign investment. As a result, this will provide opportunities for foreign capital banks
Meanwhile, there are negative impacts such as financing difficulties caused by an increase in direct financing by foreign capital companies and worse profits resulting from an increase in wage costs. However, corporate loan demand resulting from increased investment of capital goods and household savings resulting from a wage rise are expected to increase