China has a long history of rigorous regulations of cross-border capital flows, which helped it to survive through the times of financial instability. Starting with 2011, China has made significant steps to liberalize its capital controls, which made it more attractive for foreign investors. However, despite recent changes, investing in Chinese banking sector is associated with many risks that are not likely to be outweighed with benefits.
The startup company NetBank Limited is contemplating investing in online banking in China, designing the websites that would appeal to their target audience specifically. Expanding to China would certainly give the company a lot of benefits. The Chinese economy has reached stability: at current rates of growth, China is expected to rival with or even surpass the US economy in two decades. The middle class of the country is increasing dramatically, and the urban population finally exceeds the rural one. The burgeoning middle class in developed cities are the primary audience that may be interested in the financial services of NetBank as they want more luxury goods and their standards of living are rising (Barton, 2013).
However, foreign-owned banks in China have to face a lot of overrestrictive regulations. Thus, each of their new subsidiaries has to be approved by the national government and the legal entities that monitor their activity have to report to the government directly; there is also a requirement of large minimum registered capital that very few companies can comply with (Arias, 2013). It should be remembered that China is a communist country where the free market conventions are often disregarded or distorted. As China intends to introduce a centralized Internet-based infrastructure under the control of the People’s Bank of China, NetBank may be at serious risk. One of the largest risks is that the bank will be forced to finance the local projects that are only beneficial to the economy of China, but will make the institution incur losses. As the foreign exchange markets are also involved, the company’s exchange operations and reserves will also be subject to restrictive regulations. Another important risk lies in differing accounting regulations in China, though efforts are being made to change them. Even if the company is willing to comply with all the regulations, it may not be able to do it due to constant changes and lack of competence. Therefore, only large and stable companies with strong legal support should invest in the Chinese banking sector, while this may be an unprofitable decision for a startup company like NetBank Limited.
Arias, W. (2013). The Chinese Banking Industry and the Influences of the Chinese Government over Its Operations. Retrieved from https://www.youtube.com/watch?v=i-cxaGhsNjk&feature=youtu.be
Barton, D. (2013). Half a Billion: China’s Middle Class Consumers. The Diplomat. Retrieved from http://thediplomat.com/2013/05/half-a-billion-chinas-middle-class-consumers/