Unpicking China’s Financial Services resilience

Made in China?   |   Leadership accelerated   |   Building on resilience   |   Lessons from China

China’s economy is demonstrating resilience in the face of disruption. So, too, are China’s financial institutions. What can foreign players take from China’s experience?

China’s resilience throughout the COVID-19 pandemic is well documented. The country’s healthcare system flexed in the immediate crisis (massive capacity was added, literally overnight). Manufacturing output quickly returned to strong growth (hitting 10-year highs at the end of 2020¹). Consumer confidence and retail sales have started to follow.

The spectacular resilience demonstrated by China’s financial institutions is also without debate. Much has been said about the key role played by China’s digital banks and financial institutions – giant payments players like Tencent and Alipay; digital insurers and financial conglomerates such as PingAn; digital banks and asset managers including WeBank. Since the crisis began, these institutions have been enjoying substantial gains in users and volume driven by the shift to digital channels in banking and retail.

China’s traditional state-owned banks are also showing remarkable resilience. Industrial and Commercial Bank of China (ICBC), the world’s largest bank by assets and profits, reported an increase in net profit before provisions of 2.1 percent in the first half of 2020²; China Construction Bank (CCB), the world’s second largest, saw net profit before provisions increase by 5.4 percent. Both banks saw non-performing loan ratios rise only slightly (by 0.07 percent)³.

Some of the reasons for China’s financial services resilience are clearly unique to China. The country is, essentially, the only ‘cashless’ big economy in the world; the Chinese government has been encouraging the shift to a digital economy in recent years. Digital payments and financial infrastructure, therefore, was already widely adopted and well tested before the pandemic began.

With much of China’s financial sector controlled by state-owned enterprises, liquidity and credit concerns were largely mitigated. China’s government and Central Bank injected liquidity into markets where required. Buffers were quickly created to ensure any increase in credit losses could be managed over the medium-term. Swift action by the Central Bank played a key role in helping stabilize foreign trade and investment, supporting localized economic growth and social development, and driving financing towards key healthcare priorities.

China’s culture of innovation and technological adoption also proved critical to the resilience of the financial services sector. Historically, China’s banking clients rather enjoyed a visit to the branch (even though most banking happened online) and while banking halls are now largely empty, nobody is bemoaning the change. 

China’s individual institutions must also take a significant degree of credit for the sector’s resilience. The frictionless interaction and stability of China’s payment and digital banking systems during the crisis speaks to the strong spirit of collaboration and partnership between the traditional institutions, digital players and Fintechs, and the high level of integration they have achieved.

At the same time, the majority of China’s financial institutions have been pouring investment into enhancing their digital footprints and capabilities. CCB, for example, spent almost US$2.7 billion on Fintech investments in 2019⁴. In the first six months of 2020, they increased their technology headcount by almost 7.5 percent (tech personnel now account for almost 3 percent of the organization’s total headcount)⁵. Many other major institutions are also making substantial investments.

Another reason for resilience in China’s financial institutions comes down to their deep knowledge of their customers through use of big data or other means. China’s financial institutions have fostered close relationships with their clients, both personally and digitally. That has allowed institutions to move quickly to respond to customer needs as they evolve.

Recent activity suggests China intends to capitalize on its strengths and double down on its efforts to build resilience. In China, government announcements and 5-Year Plans largely dictate the future shape of the economy. It is telling that China’s government is now focusing on areas that lead to greater financial, social and environmental resilience.

Talk of a ‘dual circulation’ economy, for example, is intended to help China become more self-sufficient in terms of domestic demand drivers. President Xi Jinping’s pledge to turn China into a ‘Net Zero’ carbon economy by 2060 indicates the government’s intention to make the country more environmentally resilient⁶.

The government and Central Bank are also pushing ahead with their efforts to further digitize financial services and infrastructure. Towards the end of 2020, China’s Central Bank (the People’s Bank of China), announced the results of a pilot to launch a ‘digital yuan’ as the world’s first central bank digital currency (CBDC)⁷. The government and Central Bank are also keenly focused on driving digital financial inclusion out to those parts of the country that remain underserved or unserved.

China’s regulators are also taking steps to improve the resilience of the system by removing barriers to digital adoption. Currently, most sophisticated investment products can only be sold ‘in person’. Similarly, China’s citizens are required to be present when opening a new bank account. Recent announcements from the government suggest these barriers are being examined or relaxed. 

While it would be easy to dismiss China’s resiliency as a by-product of a centralized system, the reality is that China’s experience holds a number of important resilience lessons for financial services organizations and their oversight authorities.

1. The right digital infrastructure is critical. China’s economic and financial services resilience is largely due to the country’s existing technology infrastructure and high rates of digital adoption. This requires coordinated action between a multitude of players including telecom companies, fintechs, oversight authorities and individual financial services organizations.
2. Knowing your customer is knowing your future. Ultimately, it is the needs of customers that drive financial services growth (and regulator focus). The better a financial services organization knows their customers, the more prepared they can be to pivot and evolve as customer needs change. 
3. Prepare for the downstream risks. China’s banks have done a good job at building up their capital provisions and creating buffers to protect their balance sheets from future downstream risks such as a rise in NPLs and bad debt. Understanding the interdependence of risks is key to resilience.
4. Embrace the disruption. Both China’s government and its financial institutions recognize that disruption brings opportunity – to improve efficiency, drive innovation and build resilience. Those that embrace disruption are often able to not only survive a crisis but thrive in the midst of one.

Ultimately, the real takeaway is that – having demonstrated resilience through the pandemic and resulting economic crisis – China’s banks are once again booming ahead. Those outside of China would be well advised to study their activities closely and consider how they might be adapted within their own realities.