Citi s Trade University

Transcription

1 Citi s Trade University

2 Global Transaction Services Cash Management Trade Services and Finance Securities and Fund Services Trading with China 26 June 2007

3 These materials are provided for educational and illustrative purposes only and not as a solicitation by Citigroup for any particular product or service. Furthermore, although the information contained herein is believed to be reliable, the following does not constitute legal advice, and Citigroup makes no representation or warranty as to the accuracy or completeness of any information contained herein or otherwise provided by it. 3

4 Agenda Country Background Banking and Regulatory Environment Doing Business with China Case Study Q & A 4

5 China: The 3rd Largest Economy in the World 40 % of World Economy (Measured in 1990 International $) F W Europe US China India Japan Source: Citi estimates based on original data from Angus Maddison, 2001, The World Economy: A Millennial Perspective, Development Research Center, OECD, Paris, and Angus Maddison, 2005, "The west and the rest in the world economy: ", Australian National University, Canberra 5

6 Balanced Trade Remains A Distant Goal Percent 80 Trade Balance and Export/Import Growth US$, bil. 30 Percent 1.0 Change in the ratio of Exports from Individual Countries to Global GDP (fiveyear intervals, percent of global GDP) Trade balance (Right Axis) Exports (Left Axis) Imports (Left Axis) China Germany Japan Korea Source: Citi estimates using data from CEIC Data Company 6

7 A More Flexible FX Regime and Gain of the Yuan The trading band is likely to be widened soon The Growth of Trade Surplus with the US Led Currency Appreciation USD mn Jan-06 Mar-06 May-06 Jun-06 Aug-06 Oct-06 Dec-06 Feb-07 Apr-07 Daily Change (%) (Left Axis) CNY/USD (Right Axis) Source: CEIC Data Company Limited, Reuters data and Citi estimates Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Trade Surplus with the US (Left Axis) CNY/USD (Right Axis) Source: CEIC Data Company Limited 7

8 Investment Boom Will Likely Continue The Shanxi- Gansu-Ningxia- Qinghai area The North- East The West Eco-zone Source: China Economic Times, December 20, 2005, and Citi The South- West Tianjin Beijing The Middle Area Guangdong Province Shenzhen Guangzhou Jiangsu Province Shanghai Zhejiang Province Pan-Pearl River Delta Pan-Bohai Bay Pan-Yangtze Delta 8

9 Agenda Country Background Banking and Regulatory Environment Doing Business with China Case Study Q & A 9

10 Banking in China - Overview Key Governing Bodies Central Bank Bank Regulation Foreign Currency Control Trade Legislation Securities Regulation People s Bank of China (PBOC) Interest rates China Banking Regulatory Commission (CBRC) Banking products State Administration of Foreign Exchange (SAFE) Foreign currency Ministry of Commerce (MOFCOM) China Securities Regulatory Commission (CSRC) Banks Asset Size Large State Owned Commercial Banks (Big 4) Industrial & Commercial Bank of China (ICBC), Agricultural Bank of China (ABC), Bank of China (BOC), China Construction Bank (CCB) ICBC Joint Stock Commercial Banks (13) City Commercial Banks (112) Foreign Banks (214) Bank of Communications, China Merchants Bank, Shanghai Pudong Development Bank, CITIC, Guangdong Development Bank, etc. Guangzhou City Commercial Bank, Tianjin City Commercial Bank, etc. Citibank, HSBC, etc. ABC Asset Quality Poor GDB CMB (Listed) BOC HXB Everbright (Listed) SDB CITIC (Listed) CCB BoComm Asset Quality Good SPDB (Listed) Minsheng (Listed) Total Assets (US$ bn) Industrial Others Policy banks (3), Trust & Investment (136), Leasing Company (12), postal savings (1), rural banks (34,000), etc. NPL Ratio (%) Wuxi Suzhou XIB Beijing Asset Size Small Ningbo 10

11 Notable Foreign Investments in Chinese Banks Taiwan Lotus Worldwide + JV + 8% + 5 % Hana Bank + Qingdao International Bank % Bohai Bank + 9.0% + + 3% + 7% Hang Seng Bank + JV + 16% % Temasek % +10.0% Hong Kong Chinese Bank + JV 1% + 15% Xi an City Commercial Nanjing Commercial Bank + Bank + 1% + 1% + 4 % + 18% % 5% % 5% Other Chinese Local Partners % Jinan City Commercial Bank % % 渤海银行 % % % Consortium lead by Citi Invested 85% + 11

12 Country Clearing Infrastructure Clearing Infrastructure CNAPS (China National Advance Payment System) - HVPS (High Value Payment System) CNAPS - BEPS (Bulk Electronic Payment System) GIRO (intra-city paper funds transfer) Check & Bank Draft Nationwide Check Image Clearing System Foreign Currency Clearing System (Shanghai & Shenzhen) Information Exchange Electronic (nationwide coverage since June 05) Electronic batch settlement (nationwide coverage since June 06) Paper-based batch settlement Paper-based batch settlement PBOC image system (Live in 6 pilot cities on December 18, 2006) Electronic Settlement Method On-line settlement 3 times a day 2 times a day 2 times a day N/A On-line settlement *Citibank directly participate in all of the above clearings 12

13 Highly Regulated Market Key Characteristics Interest rates are fixed and governed by PBOC Foreign currency needs SAFE approval Standard transaction fees Set at or below cost New products need to be filed with and approved by CBRC All cross-border flows need supporting documents Trend of deregulation and reform RMB Lending Interest Rates Loan Tenor Base Rates Below 6 months 5.85% 6 months ~ 1 year 6.57% 1 year ~ 3 years 6.75% 3 years ~ 5 years 6.93% Over 5 years 7.20% PBOC base rates can be marked down by commercial banks within 10% RMB Deposit Interest Rates Deposit Tenor Deposit Rates Current Account 0.72% 7 Day Call 1.62% 3 months 2.07% 6 months 2.61% 1 year 3.06% 2 years 3.69% 3 years 4.41% 5 years 4.95% 13

14 Regulatory Environment (cont d) China is a country with the tightest foreign exchange controls on: Cross border funds transfers FX conversion FX rates State Administration of Foreign Exchange (SAFE) was set up since 1979 to execute the function of foreign exchange control nationwide Total 34 SAFE branches and 807 SAFE sub-branches across China Decentralized management each branch or sub-branch may have different explanation for different regulations. An extensive array of legislation governs the inflow and outflow of capital, goods and services, especially related to Foreign Invested Enterprises (FIEs) Companies need to open specific foreign currency accounts for different purpose and usage FCY account opening is subject to SAFE approval The purchasing and selling of FX must be executed through the banks 14

15 Deregulation Milestones A number of FCY deregulations have occurred since 2006 Establish supervisory cooperation department for banking innovation QDII Remove Pending OTC account process Allow Overseas Equity Investment for QDII More To Come Dec 2005 Jan 2006 Apr 2006 May 2006 Jul 2006 May 2007 Pudong 9 Measures FX Reform Holding company supplemental guideline Execution of new tax rate (25%) 15

16 Deregulation Trend (cont d) Column 1 Column 2 Column 3 Key Milestones Dec Pudong 9 Measures (Pilot) April FX Reform July Liberalization for Holding Company Contents 1. Foreign currency (FCY) cash pooling Holding companies in China with regional headquarter (RHQ) status and local SAFE approval 2. Offshore account for overseas liquidity management 3. Lend surplus RMB, belonging to foreign investors, to overseas affiliates 5. FCY account opening in other location Companies are allowed to open multiple FCY accounts Holding companies in China with RHQ status and local SAFE approval Holding companies in China with RHQ status and local SAFE approval More to Come 6. Simplified reporting requirement for non-trade (service items) Simplified both approval and reporting requirement for service trade Increase cap limit for FCY account Allow shipping companies to provide service in RMB Remark Pilot stage for a couple of FX related activities Liberalization for certain FX regulation nationwide Moving from pilot stage to nationwide deregulation 16

17 Deregulation of Service Trade Simplified approval process nonlisted service trade (for payments up Less supporting documents (for payments up to USD 50,000) to USD 100,000) Old New Old New Bank Review USD50K* Local SAFE Approval USD500K* SAFE HQ Approval Bank Review USD100K* Local SAFE Approval Invoice + Agreement + Tax Certificate Invoice or Agreement USD50K* Invoice + Agreement + Tax Certificate 5K* * Threshold amounts 17

18 Agenda Country Background Banking and Regulatory Environment Doing Business with China Case Study Q & A 18

19 Infrastructure Communication Internet access By end of 2006, Internet users (in China) exceeded 137 million (10.5% of total population, i.e 1.3 billion), a 23% increase year-to-year High-speed cable and wireless technology are widely used Cyber hubs are well established in major cities in China Local phone and fax access High mobile phone penetration in major cities By end of 2006, fixed phone users took 28% and mobile phone users took 35% Communication English is recognized as the first foreign language in China Most educated people are willing to use English for business/other foreign affair purposes In certain cities in Northeast China, the younger generation learns Japanese or Korean as their second language 19

20 Infrastructure Delivery Domestic courier service Inexpensive and efficient National-wide coverage EMS (national courier co. in China) could support speed post delivery within 2 days between two major cities Cross-border courier service Major service providers are all operating in China DHL, UPS, and FedEx provide courier services of 3~4 days between China and major cities worldwide 20

21 Trade Players Players In terms of sales amount, large-scale state-owned or multinational companies dominate the export market Small and medium enterprises generally play the role of feeding goods and services into the large corporate Smaller players with strong balance sheets tend to seek opportunities to export directly, otherwise they will do so through a sourcing agent 21

22 Trade Players Major Commodities China s major imports Oil & gas Iron ore Copper concentrates Aircrafts Advanced digital equipment IT equipment & products Pulps China s major exports Complete plants & equipment Digital telecom equipment Textiles and garments Light industrial products Cellular phones & computer Imported from Middle East, Africa, Russia Australia, Chile Chile, Peru, Mexico, Africa, Russia US and Europe US, Europe, Japan, Taiwan US, Taiwan Indonesia, Russia Exported to Africa, Indonesia, Middle East, Central Asia Middle East, South Asia, Africa, Latin America Europe, North America, Japan, Hong Kong, Australia, Singapore, Middle East Europe, North America, Japan, Hong Kong, Australia, Singapore Europe, North America, Japan, Hong Kong, Australia, Singapore, Middle East 22

23 Trade Players Top Ten Trading Partners Top Ten Global Trading Partners Jan-Mar 2007 Cumulative Import and Export Jan.- Mar 2007 (cumulative) Increase ±% over same period previous year USD ' Billion E.U. U.S.A. Japan ASEAN Hong Kong Korea Taiwan Australia Russia India Country / Region Source: Ministry of Commerce of the PRC. 23

24 Trade Players Major Trading Provinces / Cities Major Trading Cities / Provinces Jan-Mar 2007 Cumulative Import and Export Import & Export Export Import USD ' Billion Guangdong Province Jiangsu Province Shanghai City Shenzhen City Beijing City Zhejiang Province / City Province Shandong Province Tianjing City Fujian Province Liaoning Province Source: Ministry of Commerce of the PRC. 24

25 Trade Players Top Trading Partner Top trade partner of China is the US (in terms of single sovereign) US major import goods (from China) Telephone, telegraph, broadcast equipment, video, TVs Plastic or leather products, automobile (digital) equipment and parts Shoes, furniture, toys Luggage, boxes, office equipment Textiles and garments. US major export goods (to China) Semi-conductor circuits, aircrafts, aerospace instruments Soybeans, cotton Scrap materials of steel, aluminum, copper, etc. Waster paper 25

26 Executing Trade Transactions with China FAQs Question Frequency that L/Cs are confirmed for PRC beneficiaries What types of financing do PRC exporters get from their banks Why do most import L/Cs issued from China have usance terms Do foreign banks in China, such as Citibank China, have the full capability to provide all types of trade services What are the various L/C fees charged in China Answer 20% of advised L/Cs are confirmed Export packing loans (pre-shipment financing), L/C negotiation/discounting, factoring PRC banks usually provide RMB financing against USD L/Cs for good return (i.e.. 100~150 basis points) Importers (applicants) leverage the import financing (take goods first, and pay at maturity), given importers bargaining power of bulk purchase Yes L/C issuance fee, amendment fee, acceptance fee Fees depend on applicants creditworthiness, overall return, L/C amount and tenor, etc. 26

27 Executing Trade Transactions with China FAQs Question Is fraud much of a problem in trade transactions with China What is the current frequency of local court injunctions preventing payment under import L/Cs Do the major PRC banks have regional or centralized trade ops versus distributed processing How automated is trade processing at the major PRC banks: Back office processing systems with client CIFs, straight though linkages to SWIFT, customer input via Internet front-end, etc. Answer Not serious, since China s Supreme Court and the government authorities (i.e., SAFE) have stringent measures and regulations on trade business Uncommon and rare as this is not in the best interest of cross-border trade (injunctions will only be used serious fraud-related cases) PRC banks generally adopt a decentralized processing (Citi s model of regional processing supported by local expertise has attracted attention) Majority of the banking transactions for corporates, either cash or trade, are still manually process This includes front-end application submission and back-end processing Some effort has been made by regulators to promote automatic processing among PRC banks Note: There are banks processing trade transactions in their branches, and also banks establishing regional trade processing centers 27

28 Agenda Country Background Banking and Regulatory Environment Doing Business with China Case Study Q & A 28

29 Case 1 Multinational Company Profile: Manufacturer of steel products (for textile machinery and auto parts) Trade Activities Purchase Open account Local Generally pay through local commercial draft (a form of promissory note) for bulk purchase of steel materials Characteristics Cross-Border L/Cs cover purchase of core parts Limited open account arrangements: Short-term, around days terms Sales Financing Requirement Trade terms are short around 30 days as the steel industry is monopolized by big state-owned enterprises Open account Generally request a local commercial draft Commercial draft is frequently used due to lower financing cost Interest rates are regulated and lower than normal loan pricing Receiving L/Cs for distribution (mainly) to Southeast Asia L/C-based financing To immediately convert receivables to RMB due to strengthening of the currency Immediate financing enables the firm to apply for a timely government export tax rebate 29

30 Case 2 Small and Medium Corporate Company Profile: Manufacturer of electronics Trade Activities Characteristics Local Cross-Border Purchase Open account for purchase from Taiwan parent Terms within 60 days L/C for other overseas suppliers Sales Financing Requirement Open account Local banker s accepted commercial draft Trade terms up to 120 days or longer Receivable/invoice financing Commercial draft discounting Working capital loan Open account with Taiwan parent and US buyers L/Cs from other Asian buyers L/C-based financing To immediately convert receivables to RMB due to strengthening of the currency 30

31 Agenda Country Background Banking and Regulatory Environment Doing Business with China Case Study Q & A 31

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