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Chinese banks: a new opportunity for the IFSC Back  
Cormac Murphy and Aidan Walsh identify the opportunity for the IFSC presented by Chinese banks. They say the Chinese banks are starting to see the same opportunity as the US and continental institutions who already operate here in Dublin with Ireland’s attractive low tax and an uncomplicated double taxation agreement between Ireland and China.
A request for information on Ireland as an international financial centre is always welcome. When it comes from two of the worlds largest banks, travel arrangements are quickly made. This was to be my third visit to China in three years and the first for my travelling companion, Aidan Walsh.

Plenty of flight options presented themselves and we decided to avoid the chaos of Heathrow and Paris, choosing Frankfurt and Lufthansa. No regrets especially given that bumpy BA landing in Heathrow from Beijing the day before we returned.

Visa formalities typically involve a journey to the Chinese Embassy on Ailesbury road with a turnaround of about 3 days, and you need an invitation letter from a registered body or company in China (our Beijing office obliged). We decided to get help from Brendan Waldron of New Tigers Consulting, based in Blackrock, who had assisted us on my previous visit to Shanghai when we brought about 30 Irish entrepreneurs to Suzhou, as part of the Entrepreneur of the Year Programme in 2006.

Brendan studied in Beijing, back in the 1980’s, and is now helping Irish companies to both source supply from and sell into the Chinese market. Best of all, Brendan was able to advise us on business etiquette and what to expect on our trip. We then asked for our colleagues in Beijing to arrange business cards in mandarin and we bought some suitable books on life in Ireland to leave a picture with our clients of the quality of life they could expect to see here. Our slide deck focused on answering the question from the two clients – why had so many major financial institutions chosen Ireland? Our answer was simple - taxation, regulation and quality of life. This was supported by the September 2007 City of London sponsored review of International Financial Centres which ranks Dublin as 15th, well behind London and New York due to the obvious limitations around access to markets and size of available skill pool but importantly ahead of other smaller / niche centres such as Luxemburg and Bermuda.

Some Facts on China
No amount of statistics can paint as vivid a picture of the incredible scale of the Chinese economy as that visit to Suzhou, where the adjoining industrial park is held out as a model across Asia with onsite top class accommodation for a half million people and 12 universities offering a variety of qualifications, or indeed your first sights of the 21st century glass and concrete of Beijing or Shanghai. But to keep you going until you get there, some of my favourites are:

• Average PE ratings of stocks on the Shanghai stock exchange are still at close to 60, despite the horrendous drops in western markets of late. The resulting purchasing power of these companies is phenomenal.
• By 2010 the Chinese middle class will have grown from 10 million today to 100 million (Michael O’Leary is no doubt looking at Chinese regional airports for his long haul aspirations).
• The Chinese trade surplus for 2007 was over US250m – with the EU overtaking the US as Chinas most important export market.

No doubt the greatest achievement of the Chinese over the last 10 years has been moving about 25 per cent of its 1.3 billion population from below to above the poverty line (with 10% still to be elevated) but the wealth is everywhere in evidence. In Shanghai, I didn’t buy that Prada handbag - €1,500 seemed a poor option. The shop assistants in that case were far more attentive to the local customers. You have to see it to believe it - the magnetic levitation train that travels at over 400kmph to bring you from Shanghais Pudong International airport into the financial district that 10 years ago was simply a swamp. The vast expanse of Mongolia that you fly over on the way or best of all the opportunity to press the smiley or not so smiley face on the electronic keypad beside the immigration officer as you arrive, ‘Rate my service’ is the polite request.

So why Dublin for Chinese banks?
Chinese banking is essentially comprised of three subgroups. The huge four state owned banks have gone through radical restructuring over the last 15 years. In 2003 the Peoples Bank of China had its prudential and consumer supervisory responsibilities transferred to the China Banking Regulatory Commission (CBRC). The associated accounting reforms highlighted more deep rooted credit issues than had been envisaged with the central and regional governments having used such banks as instruments of economic policy for a long number of years. This was followed in 1994 by the creation of the second group, a bunch of ‘policy’ banks as part of the required reform of the Big 4. Between 1998 and 2005 the Chinese government systematically invested $100 billion into the Big 4 to bring capital ratios to international levels, and prepare each for IPO, with combined assets of over $3,000 billion. Nonperforming loans have been slashed from 25-30 per cent in the early 1990’s to about 3 per cent - still high against a typical 2% in western banks.

Initially these banks have been setting up in London to increase market access and better understand western banking practices. With Basel II implementations planned for 2010 their investment in Western style governance is also significant. However, a recent radical overhaul of China’s corporate tax regime has brought the issue of international tax planning into focus. The Chinese banks are starting to see the same opportunity in Dublin as the US and continental institutions who already operate here. Why pay more tax overseas than you need to? Not to mention that the Double Taxation Agreement between Ireland and China is wonderfully uncomplicated and non-dilutive.

In the case of both banks that we met, our Chinese colleagues were delighted we had made the effort and the client staff were smart, informed and interested. We left lots of promises to send more information and took away an exceptional sense of opportunity. Needless to say the Chinese Government is encouraging an outward focus from its major companies and the banks are at the front line of this.

Next steps are to get a financing company of some sort operational for each. So far the only Chinese financial services presence in Ireland is in aircraft leasing, which we will be seeing more of, while the investment banking and treasury opportunities are clear. Once one of the Big 4 puts its confidence in Dublin, we have a much better story to tell the other 3, and the other 100 or so ‘smaller’ Chinese commercial banks in the third Group of banks, who tend to have better levels of profitability and NPL’s than the Big 5.

We certainly need the tax argument to work but we also need to consider regulatory issues that if not thought out now could delay a rapid expansion here. Getting the IFR to commit to meet the CBRC regularly, and the banks themselves, would be a great start.

Unfortunately we are currently disadvantaged in trying to encourage the most creative Chinese bankers to locate here, which as we have seen in the past is critical to taking Irish financial service activities up the value curve. London has been clever in its taxation of non-residents while over aggressive use of the remittance basis in our construction sector ruined it for Ireland. We need a solution with the help of the Department of Finance.

The other messy bit is getting visas for Chinese visitors. This obviously needs to be as painless as possible. There are anecdotes of Senior Executives from Asia ending up in very messy situations. The Shengen issue is huge - having to get multiple visas for a visit to Europe is not at all consistent with the pro business image we need to deliver or to win this business. The level of Chinese investment in the Middle East and Africa is astonishing. China may even be the solution to Africa’s economic struggles which the west has consistently compounded. Europe as well as Ireland needs to compete. We need to win Asian investment.

If we miss the Chinese opportunity we will be regretting it for a long time. We met a large number of professional advisers selling other locations internationally while on our brief visit. We need to be clever and get out there.

Tell your children to learn mandarin (you are probably too old) and to do their homework because there are children in Asia who are hungry for their jobs.

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