Investment requirements to enter the Chinese market are high. In order to reach the retail market, Bank of America would need to develop a branch network, which is very capital-intensive. Given the high degree of regulation in the Chinese banking sector, Bank of America should enter the market via partnership with or purchase of an existing player in the market. This bank should be chosen with respect to how well it complements Bank of America. It needs an established branch network, experience with business finance and significant goodwill with the Chinese government. One of the strongest such contenders is the Industrial and Commercial Bank of China (ICBC), which has experience working with foreign companies such as Dresdner Bank and American Express. Bank of America should approach ICBC about a joint venture to build a working relationship as an outright merger would be impossible since the Chinese government still owns the majority of shares in ICBC.
China is a huge country, and it would be unwise for Bank of America to consider it to be one market when evaluating entry. Rather, BoA should treat entry into each Chinese province as it would a U.S. state. BoA only has branches in 21 states, and it should pace its entry into China the same way. Thus, it should focus on partnering with a domestic bank, and move into China one province at a time, beginning with either one of the independent cities (such as Shanghai) or a well-developed province such as Guangdong. Expansion into other areas can begin with an online banking strategy to spread the brand in advance of a physical move into the next market. It is expected that with a strong partner, Bank of America can gain deposits of $100 million within five years.
Gaining such a foothold in the Chinese market would help position the Bank of America well as that nation's economy develops. The rise of automobile usage and development of a condo market indicate that the Chinese market is moving towards Western models of living. Eventually, this will include a strong mortgage market (American-style subdivisions are emerging on the outskirts of Shanghai, for example) and increased credit card usage. Thus, over the next 10-20 years China will see tremendous growth in traditional American retail banking product lines. Additionally, at current growth rates the middle class in China can reasonably be expected to double or triple in that time.
Despite these opportunities, there are many threats. The first threat is with respect to the Chinese economy. Right now the Chinese growth story is tremendous, but that economy is essentially built on a house of cards, in particular the undervalued yuan. Catastrophic collapse is not out of the realm of possibility. The worse case scenario would see a substantial increase in the value of the yuan, collapse of the middle class, and possibly a reversal of economic policy. China remains a totalitarian dictatorship -- nationalization is not out of the question. In addition to the risk that things will go backwards, moving forwards also brings risks. Every major bank in the world sees opportunity in China. There is significant risk that competition will increase. At present, HSBC is the only major retail bank with a strong Chinese presence, but that cannot be expected to continue to be the case. Another risk is that the Chinese economy will not develop as expected. With limited land, the housing market and therefore the mortgage market might never develop. With no social safety net or old age pension, Chinese people are likely to continue their high savings rates and therefore a market for credit cards may never develop. The Chinese might not take to the microfinance concept.
The Chinese market is enticing, and there are substantial opportunities for Bank of America to leverage its competitive advantages in the Chinese market. However, the characteristics of the market are dramatically different from those in the United States. As a result, entry into China should not be taken lightly. It will require a local partner, unique products, and a willingness to accept significant risk should current trends not be sustainable.