GE Consumer Finance: following the flock

24th October 2005

GE Consumer Finance is to buy a $100 million stake in Shenzhen Development Bank, subject to the approval of Chinese regulatory authorities. The move is just one of the many strategic alliances contracted by foreign banks with local banks in China in 2005. The opening-up of the Chinese banking sector presents bountiful opportunities for western firms, provided they make their investments carefully.

GE Consumer Finance (GECF), part of the General Electric conglomerate, announced a strategic alliance with China's Shenzhen Development Bank (SDB). Under the deal, which is subject to approval of the Chinese regulatory authorities, GECF will buy a stake worth $100 million in Shenzhen Bank. The strategic alliance means that GECF will provide assistance to SDB with respect to its consumer finance activities in terms of management expertise, risk processes and product development.

GECF is just one of the big foreign financial institutions which are increasingly turning their attention to the Chinese financial services market. Earlier this year for example, Bank of America, UBS and Deutsche Bank each acquired stakes in China Construction Bank, Bank of China and Huaxia Bank respectively.

Major Chinese banks have recently witnessed a makeover as a result of China's campaign to join the World Trade Organization (WTO) in 2006. Indeed, as a condition of its future access to the WTO, China is required to open its banking market to foreign players. To this effect, the Chinese government has been investing large amounts of money to revitalize its major banks (which are state-owned) by writing off non-performing loans which were unlikely to be repaid. The government has also been working towards improving the image of Chinese banks in matters of corporate governance.

It is therefore not surprising that foreign banks are rushing into China. They indeed have a strong business case to do so as the economy has been booming and the potential for expansion in mortgages and consumer credit is huge. Local players will gain too through the expertise of a foreign partner, which they can apply to their underdeveloped consumer credit market.

The only caveat to be applied here is perhaps that western finance groups need to avoid the 'me too' syndrome of knee-jerk investment in what remains a comparatively unfamiliar market. Carefully-chosen moves however stand to bear considerable rewards.