Multinational Banking in China: Theory and Practice
Reviewer: Tomasz Browarny
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Over the past decade various questions have been raised concerning the Chinese business environment. Although the main focus of Meng's research relates to a particular sphere of the Chinese economy, examining the banking sector may, to some extent, reveal much about the Chinese economy in more general terms. Indeed, examining China's banking sector provides important insights into the state and culture of the business environment and provides tools for researching current market conditions. Issues related to the free flow of information, the quality of state regulations and cultural barriers are common for a variety of enterprises in China and Meng clearly presents the dynamics in relations between banks, the state and private enterprises, all of which conspire to reveal the costs and opportunities of doing business in China.
Given the rapid development of the Chinese economy over the past decade, it is increasingly becoming an imperative to intensify research on the Chinese economy. Geographical biases, often found within the Western scientific community (Euro-centricity), pose serious constraints to creating a more accurate and coherent image of the contemporary global economy. Meng argues that authors examining the internationalisation of banking have tended to focus on developed countries rather than emerging markets and although there are several empirical studies concerning foreign bank operations in China, a gap in theoretical interpretations has seriously handicapped this tract of research.
Constructing a consistent theoretical framework of multinational banking in China was surely a Herculean task considering the dynamically evolving business environment and high geographical fragmentation of the country, which according to some economists should not be treated as a single economic entity at all.
Meng's work is especially interesting because it covers the motivation of banks to invest in Chinese mode of entry, and ‘post-entry' development. Different kinds of foreign and Sino-foreign enterprises were analysed including: representative offices, branches, subsidiaries, joint-ventures and Chinese banking institutions with foreign minority investment.
The book commences by introducing a healthy variety of theories of foreign investment, which is an important point of departure since Meng advocates following a multi-theoretical approach. However, it is clear that the so-called ‘internalization theory' forms the core of this work and various other theories are deployed as a way of support. It is noteworthy that Meng does not view economics as the only discipline which requires exploration in a bid to understand China, and includes political and social aspects into his analysis.
Meng's theoretical approach is hardly influenced by resource based theory, which argues that enterprise is perceived as a bundle of resources and capabilities where valuable and inimitable capabilities are vital for gaining a competitive edge (p. 19). Instead, Meng focuses on specific assets of enterprise, and managerial skills and organisational structures are considered. Although bank size and client resources are deemed as ‘vital' for competitiveness; the capability to adjust to specific characters of the market is a key factor in China. As noted in this work, banking products can hardly be differentiated; hence the way they are offered and sold are essential variables. In China innovations in this field consist mainly in tailoring financial services to local needs (p. 95). This implies a need for creating flexible and effective structures, which can meet the challenges posed by a constantly changing business environment. Therefore, foreign banks are perceived as organisations where coordination and organisational learning are critical for gaining competitive advantages and for success in the market (p. 124).
There are many reasons why foreign banks enter the Chinese market and these are clearly distinguished by Meng. According to his line of argumentation, in most cases, multinational banks follow their clients or seek new market opportunities. As soon as a bank takes root in a local market, new motives crop up, and the scope of activity gradually shifts. Foreign enterprises can enhance their engagement, maintain the current level of commitment or withdraw from the market.
Banks deploy different strategies which, over time, are altered due to changing circumstances. The author examines differences in strategic approaches of different groups of foreign enterprises given their ‘core business range.' The study includes a comparison between various categories of banks and the identification of the competitive advantages in every category (pp. 134-135).
Meng strongly emphasises methodological correctness to ensure the validity of his findings though his main goal is not to collect facts and data, but rather to account for motives and determinants driving the development of multinational enterprising in China, and to show the interrelationship between variables.
Additionally, Meng attempts to strike a balance between general remarks and detailed analysis. Data is aggregated and analysed, but case studies have also been conducted. Detailed data in particular cases can hardly be found. All banks depicted in the study were provided with anonymity to secure their confidential data.
Anonymity is sometimes futile and becomes a formality as one can easily ‘guess' that the joint-venture formed in Shanghai between a ‘big' European bank and the Chinese ‘big-four' bank, which ended in 2003 was, in fact, BNP Paribas and ICBC enterprise (p. 110). Nevertheless, there is no reason to doubt that anonymity was secured at least in case of highly confidential data.
The study also includes a sophisticated statistical model of foreign banks development which supports the findings of this work. These sophisticated quantitative analyses were balanced by selected accounts of bank managers which enhanced the credibility of the findings.
The way the information is presented is very transparent. Bundles of information regarding different aspects of the analysis are depicted in tables and graphs. Every chapter is clearly summarised and Meng provides a summary at the end of the study, where the most essential facts and remarks are brought together.
Various issues related to business environment are examined, and strong emphasis is put on the role of the state. The Chinese authorities still maintain a strong grip on the country's banking sector and strict requirements must be met to enter the market in the first place. Access to some sectors of the market is severely limited and licences are indispensable in many cases. A lot of inconsistent and ambiguous regulations have been imposed on foreign enterprises, and state owned banks, which are key competitors to the multinational banks continue to dominate the market (p. 108).
Meng attributes this to an underdevelopment of the local market. Nonetheless, he admits that Chinese regulatory institutions are motivated by protectionism (p. 104). Such behaviour may be, to some extent, a blessing in disguise for the Chinese economy, as foreign banks try to find niches; investing in areas neglected by Chinese banks. For instance, some foreign financial institutions launched a micro-credit programme for peasants and small-sized enterprises in remote rural areas (p. 92). Nevertheless, foreign banking enterprises are still highly concentrated in China's massive financial centres along the coastal areas of the country and their main target remains Shanghai.
Importantly, Meng remarks that Chinese banks have not introduced strict credit and risk control procedures (p. 105), which in the middle-term can be a competitive advantage, but in the longer-term may cause serious problems. Also, Chinese accounting standards do not meet Western requirements, therefore lending in china can be very risky. Foreign banking institutions can hardly trust local companies and Meng cites one Western manager who claims that ‘the attitudes of the Chinese local companies are very strange. They borrow much, but they never think to pay the money back. They never care about the contracts and they never inform you how they allocate the money' (p. 108).
Another asset of the study is the in-depth analysis of the Chinese way of doing business which involves its cultural background, where personal relations are more significant than formal obligations, and saving face is of the highest importance. Following the rules of guanxi is essential in contacts with business partners as well as with authorities. It is stated explicitly that close ties with government can substantially facilitate the business (p. 122).
The expansion of foreign banking reveals a multitude of stumbling blocks. Generally, foreign banks do not always pay sufficient attention to the specific character of the Chinese market. This is of considerable importance since China is a place where cultural proximity is essential. Meng remarks that the geographical scope of foreign banks' investments converge with cultural proximity and historic ties. For example Japanese companies mainly invest in areas occupied by Japanese army during World War II (p. 34).
Cultural differences create barriers in communication which can lead to the failure of Sino-foreign joint-venture enterprises, and Meng spends considerable energy offering advice for business practitioners on how to ease cultural shock (p. 113). Additionally, state regulators are provided with guidelines on how to steer clear of problems lurking in the Chinese market, and reform its structures.
Some weak points of the study are visible as well. For instance, although previously presented as advantageous, given that the volume contains 170 pages, it is overloaded with summaries and introductions, which are present in every chapter, and thus some information, such as that content of specific chapters and some conclusions, are too frequently presented.
Considering the scientific aspect of the analysis, it can be argued that the study lacks various scenarios of Chinese market development and the development of the Chinese market into a more open and transparent entity is taken for granted and transition seems to be one-way process. Only the pace and dynamics of change are, according to Meng, unpredictable (p. 43).
Although this scenario is highly probable, there will undoubtedly be many setbacks in opening the market to foreign banks, and the ‘happily ever after' may never occur.
Whilst dangers to market opening in times of the still unfolding global economic crisis are spotted (p. 137), alternative scenarios for the Chinese market were not considered.
Despite constraints however, the booming Chinese market still attracts many new foreign financial institutions. Considering its huge and dynamically growing economy, high savings-rate and low market saturation, China offers incredible prospects for foreign banks. This situation implies the need for the development of a sophisticated theory concerning banking internationalisation in this particular country.
Meng is, to some extent, a pioneer for examining multinational banking in China. The analysis offered meets the highest levels of scientific excellence and will likely pave the way for future scientific explorations in this field.
Meng aimed to construct a study which could be of use to business practitioners, and consequently the reliability of the analysis is guaranteed and all findings are based on solid research. Mainstream theories and concepts were examined critically and applied; taking into account the specific character of the Chinese market. This has produced a comprehensive study which involves many aspects of banking internationalisation in China.
This study was aimed at ‘managers, practitioners and policy makers' as well as ‘students and researchers with an interest in banking internationalisation in emerging markets.' However, this work comes highly recommended, not only to a small group of specialists, but also to anyone wanting to deepen their knowledge on the main characteristics, boundaries and trends in the Chinese economy.