UEH UNIVERSITY

SCHOOL OF ECONOMICS, LAW AND GOVERNMENT

SCHOOL OF BANKING

FINAL ASSIGNMENT
Subject: INTERNATIONAL BANKING

Course: 23C1BAN50602901
Teacher: Dr. Pham Khanh Duy
Student:
Lê Phan Kỳ Thư – 312110213-14 – NHC01 – K47

Ho Chi Minh, October 22nd 2023

 PART A: Short Essay Questions

1. What is money laundering, and why are bankers concerned about it? What are
the three phases involved in laundering ill-gotten gains?

Money laundering is a type of financial crime that has ramifications for

individuals, corporations, and entire economies. It is, at its root, the practice of disguising
the origins of illegally obtained cash, making them appear legitimate and masking their
link to criminal operations. Money laundering allows criminals to merge unlawful monies
into the legal financial system, making it difficult for law enforcement and banking
regulators to track and seize these funds. Furthermore, money laundering affects the
integrity of financial systems by allowing criminals to exploit regulatory gaps and flaws,
ultimately weakening faith in financial institutions. On an economic level, money
laundering can dissuade investment and stifle economic progress by limiting capital
availability and creating financial system instability.

Example: The Danske Bank Scandal

The Danske Bank scandal, which broke in 2013, involves the bank's Estonian branch
processing billions of dollars in dubious transactions, many of which were tied to notable
persons such as Russian President Vladimir Putin's family. The case emphasized the
significance of strong AML controls and oversight, as well as international collaboration
in combating money laundering and financial crime.
The Danske Bank affair serves as a stark reminder of the repercussions of failing
to adopt adequate AML rules, as well as the importance of being vigilant in detecting and
preventing money laundering operations.
With a large network and a financial intermediary channel offering a wide range of
primary financial products and services such as lending, deposit receiving, financial
leasing, foreign currency trading, money market tools, and so on, the banking sector's
vulnerability to money laundering risks is rated as “Average High”. The risk of money
laundering in the banking sector is mainly associated with money laundering from asset
embezzlement (crime mainly involving people in authority), gambling, and tax evasion.
Therefore, to hide the source of money, criminals often use bank accounts in someone
else's name to receive and transfer money from illegal accounts.
If your financial institution allows money laundering, whether deliberately or
innocently, both your institution and the employees implicated may face sanctions and
fines. Criminal charges and even imprisonment may be imposed as sanctions. Individual
violators in Canada, for example, might face a $100,000 penalty depending on how
serious the infraction is and how compliant the institution has been overall. Entities may
be required to pay up to $500,000. In addition, guilty parties may face up to five years in
prison. In the United Kingdom, non-compliant institutions may have their authorization
revoked and certain operations suspended. They may also be fined and have their
websites taken down.
Laundering money typically consists of three steps: placement, layering, and
integration. The money laundering process typically includes three steps: sorting,
layering, and rationalization:
- Arrange money put into the organization's main finances.
- Layer your money concealment with a series of transaction lists and tricks.
- In the final and most logical step, funds are withdrawn from legitimate accounts
to be used for whatever goal the criminals desire.
2. List the main international banking activities and indicate how banks earn an
income from each of these activities.

2.1. The main international banking activities:

Many international banking activities are similar to domestic banking operations.

A bank, for example, may extend credit, issue and confirm letters of credit, keep cash and
collection items, maintain correspondent bank accounts, receive and place deposits, and
borrow funds in both international and domestic markets.

Other activities, such as creating acceptances and trading foreign currencies, are
more closely connected with international banking. Country risk, which involves the
political, economic, and social aspects of nations where a bank has exposure, is the most
essential aspect of international banking that is not found in domestic banking. When
analyzing a bank's worldwide activities, examiners must consider country risk. Despite
the parallels between domestic and international operations, banks frequently handle
foreign operations in different division or departments.

Typically, big banks run their own separate international business that may consist
of a network of affiliates, subsidiaries, and branches abroad. Smaller banks or banks with
less overseas business frequently have a separate division that collaborates with a global
network of representative offices or correspondent banks. Either way, foreign operations
are typically run by different staff and management teams with different internal controls
and accounting systems.

Examiners studying a bank's general health must take into account the risks
associated with conducting business abroad, especially in emerging economies, where
overseas activities are reviewed and understood. Examiners should also work with the
Office of Foreign Assets Control (OFAC), the Bank Secrecy Act (BSA), and Anti-Money
Laundering (AML) to coordinate international reviews.

Similar to domestic banking operations, many international banking activities are carried
out. In the domestic and foreign markets, for instance, a bank can borrow money, receive
and deposit deposits, hold cash and collection items, issue and confirm letters of credit,
and grant credit.

Creating acceptances and trading foreign currencies are two other actions that are
more directly related to international banking. Examiners assessing an international
bank's operations have to take country risk into account. International operations are
typically carried out by banks in a different division or department, notwithstanding the
parallels between domestic and foreign activity.

Typically, big banks run their own separate international business that may consist
of a network of affiliates, subsidiaries, and branches abroad. Smaller banks or banks with
less overseas business frequently have a separate division that collaborates with a global
network of representative offices or correspondent banks.

2.2. How banks earn an income from each of these activities:

- International Lending
Importers, exporters, multinational firms, foreign companies, governments,
consumers, foreign banks, and international branches of U.S. banks are among the
entities that borrow money from banks. The biggest international institutions and a few
smaller ones in certain markets, such as New York City, Miami, and San Francisco,
handle the majority of the world's international loans. Banks that engage in international
business still primarily rely on the interest they make from lending to foreign borrowers,
both locally and globally.

Although they are essential to international banking and improve a bank's capacity
to support correspondent relationships, other foreign activities like fund transfers may not
generate much, if any, revenue after costs. Due to banks' ability to originate, oversee, and
collect loans more effectively than they could with smaller loans, the tendency for foreign
loans to be larger than domestic loans fosters economies of scale. Larger credits,
however, frequently draw fierce pricing competition from international lenders, which
could lead to reduced net interest margins.

- Forms of International Lending Trade Finance

Financing commerce is the most typical use of international banking. Banks
typically use a variety of trade credit facilities, the most popular being bankers
acceptance financing and letters of credit. When dealing with an importer in a high-risk
or developing country, exporters are frequently reluctant to take on the risk of exporting
products without established bank financing. However, exporters may be willing to ship
goods on open account (self-financed) to credit-worthy customers in industrialized
countries. This section also covers other trade financing instruments and techniques, such
as discounting trade acceptances and direct trade advances.

- Letters of Credit (Commercial documentary letters of credit, Standby letters of

credit, Back-to-back letters of credit,..)
Various formats for letters of credit are available based on the underlying
transaction's nature and conditions. Using letters of credit required a lot of paperwork and
labor in the past. Automation, however, has simplified the process of generating credit
letters, confirming shipping documentation, and collecting money. In several instances,
the procedure has been reduced to merely track a bar code, much as what shipping
businesses and retail outlets do. Even with the advancements in technology, the bank
must carefully verify all documents to safeguard itself against liabilities and financial
loss.

Through the use of commercial documentary letters of credit, a bank (the issuing
bank) undertakes to make payments to the beneficiary, seller, or exporter listed in the
document on behalf of the customer (account party, buyer, or importer). When certain
documents are delivered to the issuing bank as stipulated by the letter of credit's
provisions, the beneficiary gets paid. Consequently, the bank replaces the other party's
creditworthiness with its own through a letter of credit. The International Chamber of
Commerce's Uniform Customs and Practices for Documentary Credits govern the
issuance and negotiation of documentary letters of credit by banks.

Every letter of credit must have the following requirements:

+ It must be granted to a specific beneficiary

+ It must be for a set or determined amount
 + It must be in a format that makes it obvious how and when payments are to be
made
+ It must have a clear expiration date. A documentary letter of credit is often sent
from the issuing bank to the exporter via its correspondent bank in the exporter's
nation. Letters of credit, both revocable and irreversible, are standard
correspondence that correspondent banks get.
- Loans to Foreign Banks
Credit extended to foreign banks is a significant component of global credit. Credit
to international commercial banks can be provided directly or through deposit
placements, which are covered in more detail below under a different section. Interbank
loans are frequently utilized to support transactions with international counterparties that
are valued in US dollars. Loans to foreign banks may occasionally be utilized for
purposes connected to commerce

- Investments
International banks may occasionally deploy capital through international capital
markets to investments like foreign debt instruments or debentures, in addition to
international loans and deposit placements. Banks can invest money at a competitive
edge over lending by using the global capital markets.

- Deposit Accounts
Deposit gathering and retention activities of international banks arise from the
exercise of other banking activities, such as:

+ Receipt of wire transfers,

+ Compensating or collateral balances required against credit facilities,
+ Disbursement of loan proceeds,
+ Payments for trade transactions, and
+ Savings or cash-management balances of private banking customers.
- Deposit Sweep programs
 Deposit Sweep programs are frequently provided by banks with global operations.
The main purpose of these sweep programs is to assist clients with cash management who
could otherwise transfer their account to another company that offers higher rates. In
sweep programs, banks employ a contract with their deposit customers that allows them
to move funds from a deposit account into an overnight investment product (sweep) if the
amount is above a certain threshold. Prior to the conclusion of business, funds are moved
out of a deposit account and back into it the following morning. On the other hand, banks
can also participate in deposit sweep programs with clients who are risk conservative and
want to transfer money into the bank over night, partly in order to receive deposit
insurance.

- Borrowings
Borrowings generated through the international department include all non-deposit
liabilities. Common forms of borrowings include:

+ Federal funds purchased (overnight and term);

+ Bills payable to the Federal Reserve;
+ Notes and trade bills rediscounted with central banks;
+ Short sales from trading securities;
+ Overdrafts on deposit accounts;
- Foreign Exchange Trading
Opportunities to engage in speculative trading in the exchange markets have
increased dramatically due to contemporary communication technology and swift price
swings. Foreign currency markets provide sophisticated hedging techniques, arbitrage,
and speculation in addition to meeting the financial needs of importers and exporters.
These activities can present banks with profitable opportunities if they have the necessary
resources. Banks that deal in this intricate and specialized area, especially those that deal
in foreign currency for their own accounts, usually have a foreign exchange department
staffed by knowledgeable dealers. Banks that do nothing but carry out their clients'
instructions and keep a matched book typically employ another bank or foreign exchange
intermediary to arrange customer transactions. Examiners should be aware of the basic
dangers involved in foreign exchange trading, even if it is typically only found in large,
international institutions.

3. What is Islamic banking? How does it differ from Western banking?

3.1. Islamic banking

Islamic banking, also referred to as Islamic finance or Shariah-compliant finance,

refers to financial activities that adhere to Shariah (Islamic law). Two fundamental
principles of Islamic banking are the sharing of profit and loss and the prohibition of the
collection and payment of interest by lenders and investors.

To earn money without the typical practice of charging interest, Islamic banks use equity
participation systems. Equity participation means if a bank lends money to a business, the
business will pay back the loan without interest and instead give the bank a share in its
profits.

3.2. How does it differ from Western banking?

One of the primary differences between conventional banking systems and Islamic
banking is that Islamic banking prohibits usury and speculation. Shariah strictly prohibits
any form of speculation or gambling, which is referred to as maisir. Shariah also prohibits
taking interest on loans. Also, any investments involving items or substances forbidden in
the Quran—including alcohol, gambling, and pork—are prohibited.

Fair sharing of risks and profits between people and banks is also an advantage. In
difficult times, banks are willing to lend non-profit loans to help businesses overcome
difficulties. For depositors, once they deposit money, they are treated like shareholders
holding preferred shares of the bank and are therefore willing to share risks and profits
with the business they own. That means, they will accept lower profits if the bank
encounters difficulties during a crisis and enjoy higher profits if the bank operates well.
This risk-profit sharing also helps Islamic banks more or less avoid the risk of losing
liquidity like Western banks.

At the same time, Islamic banks are not allowed to invest in complex derivative
products such as credit default swaps, options... which are very popular in the West (and
are considered the main culprits of corruption). financial crisis in 2008). Therefore, the
operational risks of Islamic banks are assessed to be lower than those of conventional
banks.

Example: In Los Angeles, USA, a customer who wanted to borrow money to buy a
car went to a regular bank and signed a loan agreement. That bank delivers money to the
customer. After that, the customer must periodically repay the debt, including interest
incurred on this loan. Meanwhile, in Lahore, Pakistan, a customer with similar needs can
go to an Islamic bank to sign a contract to buy a car from the bank. Instead of giving
money to the borrower, the Islamic bank will buy the car itself, then sell it to the customer
at a higher price. Customers will accept the return of the purchase price for this car
according to the periodic installment payment method.

4. What are the key elements of country risks?

Country risks are risks in investing in a specific country, but the level of
uncertainty can lead to economic losses for investors. Simply put, country risk is the level
of political and economic instability that can affect the finances of business organizations
in a country.

Types of country risks:

- Political risks:
+ The stability of the government and the power of politicians or political parties
+ Transparent reporting and access to verifiable information
+ Data on crime, violence and terrorism
+ The regulatory and policy environment and whether it hinders or promotes
growth.
 + Capacitycapacity, flexibility and mobility of the domestic workforce
+ Government programs and subsidies for businesses
+ Attitudes and acceptance of foreign direct investment with transparent capital
flows
+ The legal framework governing immigration and employment
- Sovereign risk:
This risk category specifically assesses the accumulation of debt that is the
obligation of a government or its agencies (or that is guaranteed by the government), as
well as how much such government is expected to fulfill these obligations. For example,
if a government agency refuses to return debts, it may have an influence on local lenders
and result in losses. This would, of course, have ramifications for local businesses and
anyone doing business with them.

- Neighborhood risk:
Neighborhood risk, also known as location risk, can be created by trouble
elsewhere than the country your customers are doing business with. This could have
consequences for other sovereign nations, causing havoc in foreign markets or putting
pressure on local lenders and businesses.

The following factors may contribute to neighborhood risk:

+ Geographically adjacent.
+ Partners in business.
+ Member of a particular organization or body.
+ Strategic partnership.
+ Countries are said to have similar characteristics.
+ Subjective risk: Subjective risk is not a common phrase, but it assesses aspects that
are common to most risk evaluations - and it can have a significant impact on
foreign business owners trading with a host country. Subjective risk is about
attitudes and might involve social forces and customer perceptions - whether
regarding specific commodities or specific sorts of businesses.
 - Economic risks:
Which originate both from the country's macroeconomic structure (forecast for
inflation rates, interest rates, balance of payments, GDP, etc.) and policies relating to the
system of Government. The latter involves the formulation of fiscal policy, which affects
investment incentives and rewards, as well as monetary policy, which has a direct impact
on inflation, interest rates, and exchange rates. These decisions have an indirect impact
on the economic model and the local market structure.

Risk Management departments must therefore examine the impact of potential risks
such as a substantial tax increase, the absence of support measures underlying an
investment, or changes to regulatory criteria that must be followed when establishing a
business in the country.

This raises questions and queries that must be addressed by decision-making bodies:
Is it necessary to have local partners when establishing a subsidiary? What labor policies
must the corporation implement in order to prevent confrontations with the government?
Are there tariff measures that have a direct impact on investment?

- Exchange risk:
Any anticipated loss caused by rapid fluctuations in exchange rates is often covered by
the exchange risk factor. This is another broad phrase because currency fluctuations can
be caused by a wide range of events. Although currency reserves, interest rates, and
inflation are all possible drivers of exchange risk, economic and political issues such as
those stated above can be significant drivers.

A change in currency regime, for example, from fixed to floating, is an example of a

political shift that can impact economic risk.

- Transfer risk:
Transfer risk is the final nation risk assessment factor we'll cover today. This is the
point at which the host government refuses or is unable to allow foreign currency
transfers out of the country. Sweeping regulations like these may be an unintended
consequence of a country in crisis aiming to avoid creditor panic from resulting in
massive capital outflow. Malaysia's credit limits following the 1997-98 Asian currency
crisis are a prime illustration of this.

Capital controls, regardless of the cause, can restrict foreign traders from reclaiming
earnings or dividends from the host government.

5. Why do you suppose that Citibank has been able to establish itself in so many
countries around the world? How important is the first-mover advantage in
international banking?

- Citibank was established in many countries around the world because:

+ In 1995, Citibank obtained 58% of its total profits from the foreign banking
system.
+ In 1996, the bank's profit was $4.5 billion compared to $294 billion in total assets
and $28.9 billion in capital.
+ In 1997, Citibank opened 3,400 transaction points in 98 countries. Mr. Reed has a
strategy to reinvigorate bank stocks. With the main international strategy of "going
global, connecting locally". Mr. Reed hopes to expand his global banking
relationships and financial clients in favorable business areas. Mr. Reed focused on
two-way business development after 1995, in the face of the bank's favorable
development in the international system.
- Those advantages are:
+ Time and lessons learned.
+ Localization and commitments.
+ Greatly successful development
+ Human Resources
+ Accountant
 PART B
Risk from offshore capital sourcing

1. Introduction/Foundation
In general, when it comes to jurisdictions for financial services, we can classify
them into "Onshore" and "Offshore" - Two business environments that exist throughout
the global economic environment.

In the book “Offshore Finance” by Hilton McCann argues that “Offshore” is a

term that can be interpreted in so many ways that no scope exists for it, the character of
the term changes depending on the situation and adapt to changing circumstances. On the
other hand, the book also mentions “Offshore” and “Onshore” work often as an opposing
dualism, they are mutually contradictory and their definitions also include each other.
Currently, there are many definitions for the word "Offshore", however, Collin English
Dictionary has pointed out that, when mentioning "Offshore", it means talking about:
'Based or operating abroad in places where the tax system is more advantageous than that
of the home country'. This definition makes more sense financially than geographically
because it includes taxes, comparative advantages between the foreign country and the
host country.

From that initial definition, now, when referring to “Offshore” or the terms
'Offshore Finance' (which includes 'Offshore banking', 'Offshore collective investment
schemes (funds)', 'Offshore trusts' etc.) may be taken to include financial transactions
conducted in a jurisdiction whose location is somewhere other than on the mainland
('Onshore')

Currently, widely recognized types of offshoring include:

- Offshore Business: This is the act of establishing a business function such as a

factory, company branch, call center, etc. in a country different from the country in
 which the headquarters is established. Businesses often take advantage of
favorable conditions abroad such as abundant human resources, low wages, large
markets, weak legal regulations or low tax rates to save business costs and thereby
expand their business. expand business scale.

- Offshore Investment: Refers to investors flowing their investment capital out of

the country in which they live. This helps them take advantage of low tax costs, a
dynamically developing market, and the potential of the field in the country where
they invest. Investment accounts are typically opened in the name of a corporation,
such as a corporation or limited liability company (LLC), rather than an
individual. On the other hand, this also helps foreign businesses have the
opportunity to access more diverse capital sources to develop their business
models.
- Offshore Banking: The activities of offshore banks are often associated with
securing assets in financial institutions abroad. Additionally, holding an offshore
account with the ability to save and use funds in foreign currency for international
transactions provides a simpler way to access needed capital without having to
consider exchange rates. Exchange rates change rapidly.
In this essay, we mainly focus on offshore investment activities, especially
evaluating in detail the risks that may occur in mobilizing offshore capital.

2. Capital Adequacy Ratio (CAR) and Basel Accords

2.1 Overview of the Basel Agreement

Sometimes, the financial system becomes too vulnerable to its own imperfections
and this often leads to a complete failure of the system. In fact, after a series of bank
failures in the 1980s, Basel Committee on Banking Supervision - BCBS was established
in 1974 by a group of central banks and supervisory authorities of the 10 developed
countries (G10) in the city of Basel, Switzerland to try to prevent this trend. After a
period of activity, research grants bans and sets forth the following capital adequacy
treaty requirements:

- 1998: issue the Basel I

- 2004: issue the Basel II

- 9/2010: issue the Basel III

- While Basel III awaited the final implementation deadline, BCBS continued to adjust its
terms, which became informally known as Basel IV, expected to be the merger of the
revised Basel III and IFRS 9. Basel IV is also set to begin implementation on January 1,
2022

The Basel Committee on Bank Supervision (BCBS) established a series of

sequential banking regulation accords known as The Basel Accords. The Basel Accords'
provisions have been altered and tightened through modifications. However, versions of
the Basel Accords generally demand that banks adhere to a minimum capital requirement
to ensure liquidity. Due to this, banks implementing Basel must manage capital resources
in a balanced way in order to maintain the required minimum reserve ratio and generate
profits from the use of the residual capital after deducting reserves.

2.2 Capital Adequacy Ratio (CAR)

First, when certain banks, particularly commercial banks, maintain their capital
levels too low and cannot pay the risks, this would result in numerous challenges for the
banks. Because banks are the intermediary location for storing money, people are also
quite sensitive to these issues. People will lose faith in banks and have a negative opinion
of finance if they have problems and are unable to resolve them. The result was the whole
financial system crumbling. Due to limited capital, some banks chose to increase their
investments, while others chose to maintain a steady level of capital in order to manage
financial risks. Bank capital levels became a point of contention as a result.
 The capital adequacy ratio is a basic measure for managers (Central Bank) to
evaluate the financial health of a bank. If a bank is deemed by the Central Bank to not
have enough equity capital, this bank is considered unable to operate normally and is
forced to close. Based on the capital adequacy ratio, the ability to pay term debts and
absorb other risks is determined. Therefore, in many countries, regulatory agencies
always determine and supervise banks that must maintain the minimum capital adequacy
ratio.

Currently, according to Basel II standards commonly applied by banking systems

around the world, CAR is 8%. This is meant to ensure that banks hold an adequate
amount of capital to meet their obligations. For example, if a bank has risk-weighted
assets of $100 million, it is required to maintain capital of at least $8 million.

Although each bank is required by the Basel Accords to adhere to a minimum

reserve level, some banks struggle because of the need for a strong infrastructure for
financial services and effective banking supervision systems. However, certain nations,
including China, the USA, France…, continue to proactively increase capital while
steadily exceeding the CAR (Capital Adequacy Ratio) criteria.
 Figure 1. Capital Adequacy Ratio in the world
(Source: https://www.ceicdata.com/)

3. Offshore Capital Sourcing

3.1 How capital rules the world through offshore financial centres?

John Christensen and Mark P. Hampton said that: “When capital is mobile, it will
seek its absolute advantage by migrating to countries where the environmental and social
costs of enterprise are lowest and profits are highest.”

The appeal of the Offshore environment began to be evoked in the years after the
end of World War II. The application of the death penalty and high tax rates made the
Offshore environment global with economic benefits. Lower tax rates and loose binding
conditions become more attractive than ever. Today, the explosion of financial services
over the decades has led to a more complex development of the global financial system.
This complexity may be related to the collapse of the Bretton Woods system of fixed
exchange rates, the rapid rise of the Euro, the recycling of petrodollars and the rapid
development in information technology and communications. Thanks to those changes,
more people are hoarding more money, leading to the birth of many large and small
businesses ready to seize every opportunity to expand their business models. The
financial system is considered the result of each individual or business pursuing its profit-
maximizing interests.
 From the above reason, more and more individuals, organizations and businesses
are in search of an environment in which their capital flow is not hindered by
geographical barriers, tax rates as well as not least because of relaxation. capital controls.
“Offshore” financial centers (OFCs) have done that, All OFCs share one characteristic
feature in common: they offer very low tax rates and lax regulations in an effort to attract
foreign financial assets. Although, OFCs around the world are scattered, however,
because of their dispersion, there is an even greater need to be identified by a collective
grouping within a sole forum. Each jurisdiction is relatively small so the potential
synergies arising from combining forces seem worth considering. Thanks to that, offshore
financial centers allow capital to flow around the world, according to Diamond, 1994,
offshore financial bases service an estimated $5 trillion investment funds each year. Some
of the world's largest OFCs include: USA, United Kingdom, Germany,...

Figure 2.

(Source: Jan Fichtner and Benjamin D. Hennig chart the size of the foreign assets in the
world's largest offshore financial centres)
3.2 Offshore capital in current global context

In one of their research articles, Rose and Spiegel (2007) highlighted that the
existence of offshore financial centers generates pro-competitive effects on international
banking activity. Besides that, Kleinfeld (1994) also asserts that: “[Offshore] financial
centers play an integral part in the world’s economic system by facilitating the efficient
and effective movement of capital in response to market demands”.

In fact, foreign investment contributes significantly to the economy from the

perspective of both investors and businesses receiving capital.

A core group of OFCs that structurally account for the largest portion of global
offshore capital stocks and flows were identified in an OFC ranking that was published in
2019. Besides the primary offshore grid supporting London and New York, the two
largest financial centers in the globe - The Cayman Islands, Luxembourg, Bermuda,
Hong Kong, the Netherlands, Ireland, the Bahamas, Singapore, Belgium, the British
Virgin Islands, and Switzerland make up the core group in that order.
 Figure 3. Selection of capital stocks in the main offshore financial centres

(Sources: IMF (FDI and FPEI data) and BIS (banking statistics))

Table above shows different stocks of capital accumulated in these offshore

centers including FDI, foreign portfolio investments (FPI) and different banking channels
orchestrating offshore financial flows. Together, this group represents the principal
conduit and sink locations in the globe, providing incorporation tools, tax minimization,
secrecy, and a variety of specialized services.
 Figure 4. Foreign direct investment flows
(Source: UNCTAD World Investment Report 2022)

In general, the world's foreign investment (FDI) flows have tended to increase and
have been increasingly expanding over the past 30 years.

The countries with the largest FDI inflows include: America, China,
Singapore,...Through 10 years, the top 10 changed, The United States and China
continued to hold the top two rankings, although the gap widened significantly: the
United States attracted about 50% more foreign investment ($388 billion) than China
($180 billion). Singapore, which entered the rankings for the first time in 2014, came in
third with $141 billion. France, Canada, Sweden, and India replaced Cyprus, Germany,
the British Virgin Islands, and Ireland in the bottom half, which saw a nearly complete
overhaul.

Figure 5. Inflows in the world from 2012 to 2022

(Source: Visual Capital list journal)

The countries with the largest FDI capital inflows include the US, Germany, and
Japan. Numerous nations that top the lists for inflows (such as the United States, China,
Canada, and Australia) also top the lists for outflows in 2012 and 2022.
 Figure 6. Outflows in the world from 2021 to 2022

(Source: Visual Capital list journal)

However, in addition to tax benefits, it provides an economic foundation for

development with diverse and strong capital flows. Foreign markets still pose potential
risks, as Picard, P. M., & Pieretti, P. (2011) said: “Foreign financial centers are often
considered parasites that thrive by attracts tax cheats and money launderers.”

Besides, the growth of the foreign exchange market for a particular currency
causes some difficulties for central banks in maintaining monetary stability. The difficulty
in identifying and managing the money supply in a given currency may increase if there
is a foreign market for that currency. Foreign exchange markets with a particular currency
can also make it difficult to monitor and manage bank credit.

4. CAR of Vietnamese Banks and Funding Sources in recent years

4.1. CAR of Vietnamese Banks
Figure 7. CAR of State-owned banks and Joint stock commercial banks in Vietnam from
2012 to 2021 (Source: https://www.statista.com)

Figure 8. Vietnam CAR from June 2022 to May 2023

(Source: https://www.ceicdata.com/)
 Figure 9. CAR of Vietnamese commercial banks from 2015 to 2021
(Source: tapchinganhang.gov.vn)

During the period 2015 - 2021, the Governor of the State Bank issued two legal
documents, Circular No. 36/2014/TT-NHNN dated November 20, 2014, stipulating limits
and precision to ensure safety in operations of credit institutions, foreign bank branches
and Circular 41/2016/TT-NHNN dated December 30, 2016 regulating the entire capital of
banks and foreign bank branches, to regulate regulating capital adequacy rules in the
direction of approaching modern banking governance standards such as the Basel II
Agreement. Figure 2 shows that from 2015 - 2018, the CAR Level of all NTMs in the
system tended to decrease. However, similar to 2005 - 2014, at this stage, larger scale
NTMs such as the group of State-owned NTMs and NTMs in the market have proven to
maintain capital safety. lower than smaller or unlisted interior scale components. The
reasons for reducing the CAR coefficient at banks during this period are:

1. During this period, due to the increase in bad debt in the system of commercial
banks, the real value of charter capital at commercial banks has decreased, and at
 the same time, with the decrease in tier 1 capital according to the new calculation
method. stipulated in Circular No. 36/2014/TT-NHNN, thus reducing CAR.
2. The scope of asset groups subject to the 150% risk coefficient has been expanded
compared to Circular No. 13/2010/TT-NHNN, causing the total risk-bearing assets
of commercial banks to increase, thereby making reduce CAR.
3. Compared to Circular No. 36/2014/TT-NHNN, Circular No. 41/2016/TT-NHNN
has recognized more credit risk mitigation measures that commercial banks can
apply to reduce the value of their assets. receivables, thereby reducing capital
requirements for credit risk and thereby, reducing CAR.
4. Fourth, Circular No. 36/2014/TT-NHNN stipulates that the risk coefficient
associated with credits is 0 - 150%; However, according to Circular No.
41/2016/TT-NHNN, it is adjusted to the highest level of 250% and is specified in
more detail to reflect the risk level of each loan and each loan. partner. Therefore,
for banks that have applied Circular No. 41/2016/TT-NHNN, this regulation will
increase the value of assets adjusted according to the risk coefficient of these
commercial banks along with calculation requirements. more accurate and
complex, thereby reducing CAR.
In the period 2018 - 2021, the CAR level in the system of commercial banks tends to
increase quite strongly compared to the previous period. Especially during this period, for
commercial banks that have not met the capital adequacy ratio calculation according to
Circular No. 41/2016/TT-NHNN, the State Bank of Vietnam is allowed to apply Circular
No. 22/2019/TT-NHNN dated November 15, 2019, of the Governor of the State Bank of
Vietnam stipulates limits and safety ratios in the operations of banks and foreign bank
branches, with looser regulations on system calculation requirements CAR number. In
addition, with projects and policies of the Government and the State Bank such as
Decision No. 689/QD-TTg dated June 8, 2022, of the Prime Minister approving the
Project "Restructuring the system of credit institutions, application associated with bad
debt handling in the period 2021 - 2025", Decision No. 1382/QD-NHNN dated August 2,
2022, of the Governor of the State Bank on promulgating the Banking Industry Action
Plan to implement the Project "Restructuring the system of credit institutions associated
with bad debt handling in the period 2021 - 2025"... to improve efficiency, quality of
operations and implement solutions to increase the charter capital of the banking system
to Improving and enhancing financial capacity, gradually applying modern banking
management standards according to Basel II, the group of commercial banks has
implemented many measures to increase capital at the same time with high-profit results
through restructuring. asset portfolio, bad debt handling..., and from there, gradually
improve the CAR coefficient.
4.2. Some Vietnamese banks with high CAR

Currently, the CAR coefficient is calculated according to Circular 41 of 2016

following Basel II international standards, which is set at a minimum level of 8%.
According to the project "Restructuring the system of credit institutions associated with
handling bad debts in the period 2021 - 2025", the banking industry strives to reach a
minimum of 10 - 11% by 2023. ; By 2025, reach a minimum of 11 - 12%.

The latest updated data of the State Bank as of the end of October 2022 shows that
the total equity capital of state-owned commercial banks applying Circular 41 is 422,786
billion VND, an increase of 15.23% compared to the beginning year. CAR is at 9.04%.
Meanwhile, the total equity capital of joint stock commercial banks that have applied
Circular 41 is VND 722,854 billion, an increase of 18.52% compared to the beginning of
the year. The capital adequacy ratio is much higher than that of state-owned commercial
banks, reaching 12.29%. In a recently published report, VNDirect assessed that CAR at
Vietnamese banks has had good improvements, however, the capital buffers of
Vietnamese banks are still relatively low compared to international standards. According
to Dr. Can Van Luc, BIDV Chief Economist, CAR of banks in Vietnam improved slowly
and at a low level compared to the region. Not to mention that countries in the region
have applied Basel III or part of Basel III, while Vietnamese commercial banks are only
in the phase of implementing Basel II.
 However, there are still banks with high capital adequacy ratios, typically
Techcombank at 15.2%, followed by VPBank at 15%, HDBank at 13.40%, VIB at 12.7%,
LienVietPostBank is 12.36% and MB is 11.5%. Ms. Tran Thi Khanh Hien, Director of
Analysis Division, VNDIRECT Securities Company, commented that the joint stock
commercial banking sector will continue to set a higher CAR ratio target thanks to being
proactive in capital management and close access. with Basel III standards to build a
solid capital base and promote loan growth. Accordingly, among more than 20 banks that
have implemented Basel II, some banks have completed Basel III such as
LienVietPostBank, VPBank, ACB, TPBank... and all are from the joint stock banking
sector. To improve the ability to ensure liquidity and stabilize the system, banks have had
a long "journey" and by the end of 2022, for example, LienVietPostBank has announced
the completion of implementing Basel Risk Management Standards. III and International
Accounting Standards IFRS 9. Accordingly, this bank has become one of the few credit
institutions in Vietnam to complete the simultaneous implementation of two standards of
risk management and financial reporting. strict in the banking sector worldwide.

5. Why do Vietnamese banks seek international capital sources?

5.1. Strengthen medium and long-term capital sources

It is clear that banks issue international bonds to increase medium and long-term
capital sources, as the amount of capital mobilized through this channel often has a fairly
long term, if the term is 5 years or more, it is also counted. Level 2 equity capital to
calculate the capital adequacy ratio (CAR), especially for banks that have applied Basel 2
standards since the beginning of this year, but asset quality has more or less declined due
to the impact of the COVID-19 pandemic.

5.2. Develop business goals for the future

Banks also increase foreign currency capital to develop business goals for the
future, such as foreign currency lending activities when the loan demand of businesses,
especially export groups, is always increasing. increased following the expansion of
Vietnam's trade activities before the signed free trade agreements (FTAs) and benefiting
from the trade war of major powers.

6. Analyse real cases of 1 or 2 banks in Vietnam

Asian Development Bank (ADB) and Vietnam International Bank (VIB)

announced a syndicated loan agreement worth 260 million USD.

According to the agreement, this is an unsecured loan with a term of 3 years,

including a direct loan worth 100 million USD from ADB and a syndicated loan worth
160 million USD by ADB and United Overseas Bank (UOB). Arrangements from 9
leading Asian financial institutions.

With this agreement, VIB and its partners will promote capital financing for
individuals to buy or repair houses and finance business activities of individuals and
SMEs, including dependent SMEs. female boss.

Within the framework of the agreement, VIB also cooperates with ADB to
implement a technical support program for female entrepreneurs with a budget of
500,000 USD from the Women Entrepreneurs Financial Initiatives Fund (WE-FI). This is
ADB's first technical assistance to a Vietnamese bank to promote women's
entrepreneurship.

6.1.1. Purpose of the international source

This program has supported increasing access to finance for small and medium-
sized enterprises (SMEs) and business individuals, while also providing capital assets to
buy and repair homes for individual customers.

6.1.2. Benefits of the international source

Sharing about the agreement between ADB and VIB, Mr. Han Ngoc Vu - general
director of VIB - said: "This cooperation agreement confirms our existing partnership
with ADB, and at the same time affirms our efforts to efforts of the parties in enhancing
financial access for individual and SME customers.
 This is a very timely action by ADB, VIB, and related parties, especially in the
context that individuals and SMEs are in great need of capital to restore and develop
production and business after the waves. COVID-19 epidemic, as well as contributing to
improving the living environment for individual customers."

Successful mobilization of foreign capital contributes to affirming the prestige of

the VIB brand in the international financial market.

With the successful mobilization of syndicated loans in the international market

with great value, attractive interest rates, and terms, VIB will continue to expand credit to
serve customer needs, while optimizing profit margins during a period of potential
growth and maintain a profitability ratio among the industry leaders.

7. Potential risks?
Although offshore capital sourcing can provide various benefits, it also carries
several risks, including foreign exchange risk political risk, payment risk, legal risk and
interest risk, particularly:

● Foreign exchange risk:

Bond issuers in domestic currency must generally offer an interest rate high
enough to attract investors, as this rate must offset inflation and be more appealing than
the rate for 12-month or longer savings deposits. Meanwhile, foreign currency bonds can
be issued at an "easier" interest rate, lowering credit institutions' financial costs. With the
Federal Reserve of the United States (Fed) forecasting an interest rate cut in the near
future, the interest rate risk for bonds or loans with floating interest rates is now lower
than in previous years.

Particularly, foreign currency bonds are subject to exchange rate risks in addition
to interest rate risks, as banks frequently convert the majority of their foreign currency
revenue into dong for lending in order to enjoy a higher interest rate margin if the
depreciation of the dong is greater than the benefit gained from the conversion. For
example, if banks sell foreign currency to obtain dong for lending at a higher interest rate
than the rate for foreign currency lending, the depreciation of the dong against the US
dollar must be less than 4%; otherwise, banks will suffer losses.

Aside from raising equity capital, long-term foreign currency capital assists banks
in increasing mid- and long-term funds to ensure business expansion, especially when
local investors' financial resources remain limited. Because the ratio of short-term capital
used for mid- and long-term lending is expected to fall to 30% in 2021-2022, banks will
be in desperate need of mid- and long-term capital. This capital demand is especially high
for banks with a strong retail banking and consumer finance presence. Furthermore, since
the deposit rate for US dollars was reduced to zero in 2015, foreign currency deposits at
banks have declined or flowed to large banks with strong foreign currency trading
capabilities, such as Vietcombank. Meanwhile, bank demand for foreign currency loans
has remained strong. Therefore, banks short of foreign currency funds will lose clients in
the import-export trade.

● Political risk:
Political risk is a significant concern when engaging in offshore capital
outsourcing, which involves raising funds or investing in foreign markets. Political risk
refers to the potential negative impact of political decisions, actions, or events in the
foreign country that can affect the safety and profitability of offshore investments or
funding. Offshore capital sourcing may involve dealing with different political and
regulatory environments. Changes in government policies, tax laws, or regulations in the
foreign country can impact the terms and conditions of the financing.

Political instability, such as frequent changes in government, coups, civil unrest, or

violent protests, can disrupt business operations, lead to property damage, and potentially
result in asset expropriation. Sudden changes in laws, regulations, or tax policies can
significantly impact the financial performance of offshore investments. For example,
changes in tax rates, tariffs, or import/export regulations can affect costs and profits.

● Legal risk:
 During business operations, many foreign-invested enterprises borrow capital from
their owners in the form of unguaranteed foreign loans. This is a quite convenient capital
mobilization channel for FDI enterprises. However, due to the frequent nature and
relative ease of borrowing capital, many businesses are subjective and do not clearly
understand the legal regulations on foreign loans, leading to the following legal risks:

1. Failure to repay the loan to the owner

2. Loan interest expenses are not counted as deductible expenses when finalizing
corporate income tax

3. Pay fines for violating regulations on unguaranteed foreign loans.

Offshore markets may have different legal and regulatory frameworks compared to
the home country. Differences in contract law, property rights, and financial regulations
can create legal uncertainties. Disputes related to contracts can lead to legal risk. This
includes disagreements over terms, obligations, and performance under financial
agreements or investment contracts. Regulatory compliance requirements, including anti-
money laundering (AML) and know your customer (KYC) regulations, may differ from
those in the home country. Non-compliance can lead to legal challenges. Disputes related
to contracts can lead to legal risk. This includes disagreements over terms, obligations,
and performance under financial agreements or investment contracts. Legal risk may
arise if foreign courts or legal systems are perceived to be less effective or less reliable in
enforcing contracts and resolving disputes.

● Interest risk:
Interest rate risk is a significant concern when engaging in offshore capital
sourcing. Offshore capital outsourcing typically involves borrowing funds from foreign
financial markets or institutions, and interest rates can fluctuate due to various factors.
When a company borrows offshore, it typically incurs a debt denominated in a foreign
currency. If interest rates rise in the foreign country, it can increase the cost of servicing
the debt. Additionally, if the exchange rate between the foreign currency and the
company's home currency changes unfavorably, the debt servicing cost can further
increase. Furthermore, offshore markets may exhibit different patterns of interest rate
volatility compared to domestic markets. A rise in interest rates in the foreign market can
lead to higher borrowing costs and increased debt servicing expenses for the company.

Imagine a U.S.-based multinational corporation, ABC Inc., is looking to expand its

operations in Europe. To fund this expansion, ABC Inc. decides to borrow €10 million
from a European bank, denominated in euros, at a variable interest rate. At the time of
borrowing, the euro interest rate is 2%, and ABC Inc. expects the expansion project to
last five years. As a result of the interest rate hike, ABC Inc. experiences a significant
increase in its borrowing costs. The annual interest expense on its €10 million loan rises
from €200,000 (2% of €10 million) to €400,000 (4% of €10 million). This represents a
cost increase of €200,000 per year. The increased interest expenses put pressure on the
financial viability of the expansion project. ABC Inc. must allocate a larger portion of its
cash flow to service the debt, potentially impacting other aspects of its business
operations.

This example demonstrates how offshore capital outsourcing can expose a

company to interest rate risk. Fluctuations in foreign interest rates can significantly
impact the cost of servicing offshore debt and may affect the overall financial viability of
projects or operations that rely on this debt.

● Payment risk:
Payment risk in the context of offshore capital outsourcing refers to the risk of not
receiving the agreed-upon payments or experiencing delays or difficulties in receiving
funds related to offshore investments, lending, or other financial transactions. This risk
can be associated with various factors and can affect both borrowers and lenders.

Payments in offshore transactions often involve currency exchange. Fluctuations

in exchange rates can lead to variations in the amount received or paid, potentially
resulting in unexpected financial losses. Besides, some countries may impose restrictions
on the transfer of funds across borders, making it challenging to move money in and out
of the offshore market. This can lead to delays in receiving payments. Regulatory
requirements in the offshore market can affect the timing and process of payments.
Differences in tax laws and double taxation agreements between countries can affect the
amount of funds received. Companies may need to navigate complex tax regulations
when repatriating funds.

8. Conclusion

In the context that the risks of foreign currency interest rates and exchange rates
are reduced significantly at present as well as in the future, while banks still have big
demand for increasing equity capital and mid-and long-term funds but domestic financial
sources remain limited, seeking foreign currency capital offshore appears to be the most
appropriate strategy

In conclusion, offshore capital outsourcing, or the process of raising funds or

investing in foreign markets, offers numerous opportunities for businesses seeking to
expand their financial resources and global reach. However, it also presents a range of
challenges and risks that must be carefully assessed and managed.

Key considerations in offshore capital outsourcing include financial risks such as

currency exchange and interest rate fluctuations, payment risks associated with cross-
border transactions, political and regulatory risks, and legal complexities specific to
foreign jurisdictions. To navigate these challenges effectively, companies must engage in
thorough due diligence, engage with local experts, and develop robust risk management
strategies.

Offshore capital outsourcing can be a valuable strategy for diversifying funding

sources, tapping into new markets, and pursuing growth opportunities. When executed
with a keen understanding of the unique dynamics and risks of offshore markets, it can
help businesses achieve their financial and strategic objectives while mitigating potential
pitfalls.
 Ultimately, success in offshore capital outsourcing hinges on comprehensive risk
assessment, adaptability, and the ability to navigate the regulatory, legal, and financial
complexities of foreign markets. With careful planning and strategic execution,
businesses can harness the benefits of offshore capital outsourcing while minimizing its
inherent risks.
 PART C
Analyze the International Banks operating in China

1. Introduction
1.1. International Banks definition
1.1.1. What is International Bank?
The practice of offering financial services across international borders is referred to
as international banking. Banks serve clients worldwide with services such deposit
taking, loan issuance, payment processing, and investment product sales. Businesses can
invest abroad and obtain funding from international markets thanks to international
banking. Additionally, it allows users to move money between international nations
without utilizing local currency conversion services.

Understanding the laws that control international banking is crucial for defining
the industry. Governments both home and abroad, as well as international financial
institutions like the World Bank and the International Monetary Fund, strictly supervise
international banking. By requiring banks to manage funds appropriately and follow
internationally recognized guidelines for responsible lending, these regulations aim to
shield consumers from financial exploitation.

1.1.2. Understanding the International Banking System:

The international banking system is capable of performing a wide range of duties.
International banking offers three essential core services: foreign exchange, export credit,
and letters of credit. A significant part of supporting global investment and trade is played
by each of these services.

With the help of letters of credit, a bank guarantees the seller's payment in the
unlikely case that the buyer defaults. In most cases, buyers need to deposit money with
the bank in order to obtain the letter of credit. This document can then be used by the
buyer to pay for the products or services during the transaction. Consider the letter as a
financial agreement between the seller, the buyer, and the bank. It specifies that if the
terms of the letter are fulfilled, the seller will receive payment by a specific date for a
specific amount of money.

A bank in the exporter's nation extends a credit line to the importer so that the
importer can buy products from the exporter. This type of financing is known as export
credit. Usually, the importer repays the loan over the predetermined length of time. This
kind of funding is crucial for opening up trade between nations and giving companies
access to products from all around the world.

The process of changing one nation's currency for another is known as foreign
exchange. This is usually done to make international investment and trade easier since it
gives companies access to markets abroad without having to worry about currency rates.
A crucial component of international banking, foreign exchange can assist companies in
controlling the risks involved with cross-border transactions.

1.1.3. Types of International Banking Structures

- Correspondent bank: To enable smooth cross-border transactions, correspondent
banks build connections with other banks overseas. Banks can execute
transactions in foreign countries without physical presence thanks to
correspondent banking connections. Or, to put it simply: The correspondent bank
serves as a middleman by establishing connections between domestic and
international banks.
- Representative office: Banks establish representative offices in order to carry out
certain operations overseas. This involves, among other things, marketing and
promotional efforts in addition to upholding connections with correspondent banks
in the host nation. The parent bank can effectively handle regional lending
requirements and regulations thanks to a representative office. Consequently, the
goal of a representative office is to better service clients in the home market rather
than to expand into new markets.
 - Foreign branches: Foreign bank branches serve as a way to enter new markets and
reach a wider clientele, while representative offices are established overseas to
carry out specific banking operations and to better serve the domestic market. As a
result, international bank branches allow banks to conduct business abroad.
Depending on the rules and legislation of the host nation, the services provided
overseas might not be the same as those provided locally.
- Subsidiary and affiliate banks: Affiliate and subsidiary banks can be utilized in a
manner akin to branch offices in order to expand into new areas. The ownership
structure and degree of independence are where these companies diverge most.A
subsidiary bank is majority-owned (more than 50%) and controlled by a parent
bank, which means that the parent bank continues to have strategic and operational
control. On the other hand, an associate bank's ownership position is less than
50%, which further diminishes the degree of control.
- Offshore banks: Known as tax havens, offshore financial centers are home to
offshore banks. Asset protection against lawsuits or political unrest in their home
country is a primary factor for firms and individuals to deposit money in offshore
banks. The rationale is that, in comparison to the parent bank, these nations
typically offer more favorable legal, regulatory, and tax environments. Typically,
offshore banks function as subsidiaries or branches.

1.2 Overview of China's banking industry

Over the past few decades, China's economy has expanded significantly, and its
institutions have undergone modernization. A social market economy has also given the
economic institutions greater autonomy than one that was predicated on communist
principles. The Chinese banking sector is undergoing a reform program to support the
economy's anticipated multi-year transition to a form of capitalism and to move from
state to private ownership as these changes continue to take shape.
 The global banking industry was valued at 7.5 trillion US dollars as of the third
quarter of 2022. China has one of the biggest and most sophisticated banking systems on
the planet, given its size and population. China's banking sector has had a spectacular era
of expansion over the last 40 years, which has been required to meet the country's
residents' banking demands and the economy's increasing need for financial services.

China's banking industry grew to become one of the biggest globally. Five Chinese
banks are among the top ten global banks. In addition to the sizable state-owned banks,
the nation is home to more than 100 regionally operating commercial banks and has
granted permission to foreign banks to create branches.

1.2.1 Chinese Banking Structure

The People's Bank of China (PBoC), the nation's central bank, was the only
organization allowed to conduct business in China, creating a monolithic financial system
in the past. Five state-owned specialist banks were given permission to take deposits and
carry out banking operations when the government opened up the banking sector at the
beginning of the 1980s. The China Construction Bank (CCB), Bank of China (BoC),
Bank of Communications (BoCom), Industrial & Commercial Bank of China (ICBC),
and Agricultural Bank of China (ABC) are these five specialist banks.

Three more banks were founded by the Chinese government in the middle of the
1990s, each with a distinct lending objective. The Export-Import Bank of China, the
China Development Bank (CDB), and the Agricultural Development Bank of China
(ADBC) are some of these policymaking banks.

The specialized banks have all conducted initial public offerings (IPOs) and have
varying degrees of ownership by the public. The Chinese government still owns the bulk
of the banks notwithstanding these IPOs.

Additionally, China has approved the operations of over a hundred city commercial
banks and twelve joint-stock commercial banking organizations. China has banks
specifically designed to serve the nation's rural communities. Additionally, foreign banks
were permitted to open branches and strategically invest as minorities in a number of
state-owned commercial banks in China.

By the end of 2021, the Chinese banking sector had assets totaling 288.6 trillion
yuan, or $42.7 trillion.

1.2.2 Chinese Banking Regulation

The China Banking Insurance Regulatory Commission (CBIRC), which took over
from the China Banking Regulatory Commission (CBRC) in April 2018, is the primary
regulatory agency in charge of monitoring the country's banking industry. The task of
drafting the laws and guidelines controlling China's banking and insurance industries falls
to the CBIRC. In addition, it approves the opening or growth of banks, oversees and
inspects banks and insurers, gathers and disseminates statistics on the banking industry,
and addresses any possible issues with liquidity, solvency, or other issues that may arise
at specific institutions.

The Chinese banking system is mostly under the control of the People's Bank of
China. In addition to enforcing monetary policy and serving as the nation's spokesperson
in foreign fora, the PBoC is tasked with lowering overall risk and advancing financial
system stability. The PBoC also oversees the nation's payment and settlement system and
controls bank-to-bank lending and foreign exchange.

2. Operating situation of international banks in China

2.1. Operational situation and market share of international banks in China

By the end of 2006, 74 foreign banks from 22 different countries and regions had
established 200 branches and 79 sub-branch locations throughout China. The total capital
of both domestic and foreign currency had reached 103.3 billion dollars, while deposits
totaled 17.8 billion and loan balances totaled 61.6 billion.

According to China's declaration to the World Trade Organization (WTO), all foreign
banks were allowed to operate on the Chinese mainland as of 2006.
 In the past 20 years, nearly 50 foreign banks have established representative
offices, branches, or subsidiaries in China, and nearly 30 banks have established wholly
owned subsidiaries there.

Figure 10. Foreign banking establishment in China as of 2012

(Source: CBRC Annual Report 2012)

Below is a summary of 17 international banks that have established wholly-owned

subsidiaries in China. The banks come from 9 regions/countries around the world, most
of them are developed countries and the banks were previously listed on the stock
exchange. Each bank has very different strategies to access the Chinese market, but in
general, subsidiaries are established in large, economically developed cities such as
Beijing, Shanghai, Nanjing, and Shenzen. .
 Figure 11. List of international banks operating in China
(Source: The Entry Of International Banks In China - Yichen Wang, Régis Chenavaz)
 After a period of operation in China, generally speaking, the capital volume of the
majority of these foreign banks' Chinese subsidiaries increased, specifically:

Figure 12. Total banking assets of foreign banks (2004 - 2012)

(Source: CBRC Annual Report 2012)

Among them, some banks with excellent performance can be mentioned as:
 Figure 13. Total asset of banks in China (Million Dollar)
(Source: The Entry Of International Banks In China - Yichen Wang, Régis Chenavaz)

With a total capital of 59.9 billion dollars as of 2013, HSBC China tops the list and
is nearly twice as large as BEA. In terms of capital expansion speed, it comes in first
place as well. However, SMBC, which comes in first place for abnormal rate of return,
comes in sixth place for capital expansion speed, which does not accurately reflect its
exceptional capacity for capital growth.

For consecutive years, HSBC was also awarded as the “Best Foreign
(Commercial) Bank in China” by FinanceAsia. In 2022, HSBC's website was recognized
by Asia Money as it is the largest foreign bank in the country, operating in 50 cities, with
150 outlets and over 7,000 employees.

Figure 14. Net incomes of international banks in China

(Source: The Entry Of International Banks In China - Yichen Wang, Régis Chenavaz)

HSBC China reported a net income of 606 million dollars in 2013. For the
following three years, the bank holds the top spot in this category, rising by 290% in
2010. In 2010, SMBC is ranked fifth, and Standard Chartered Bank China is ranked
second. Without a doubt, HSBC outgrew these foreign banks in terms of overall growth
rate, followed by Standard Chartered Bank, BEA, and Citibank. It's important to note that
while Deutsche Bank continued to grow at a steady rate in 2012, net income fell in the
majority of foreign banks.
 Figure 15. Net interest income rate of international banks in China
(Source: The Entry Of International Banks In China - Yichen Wang, Régis Chenavaz)

Around 2.4% of interest income is received overall. With a net interest income rate
of 10.45% in the first year after the establishment of its Chinese subsidiary, SBC took the
top spot in 2012. In this category, the bank came out on top in 2013. In the same year,
SMBC's interest income rate was 1.53%.
 Figure 16. Average ROA of international banks in China
(Source: The Entry Of International Banks In China - Yichen Wang, Régis Chenavaz)

With the exception of Citibank, which had a negative ROA in 2008 and 2009, and
East West Bank, which had a negative ROA in 2009, the average annual ROA of the
majority of foreign banks is generally around 0.6%. Prior to 2008, Citibank had the
highest ROA (2.36%), and its average ROA was among the highest. However, the
financial crisis caused its ROA to start declining. The 2013 data shows that HSBC came
out on top with 1.11% ROA, Deutsche Bank came in second with 0.73% ROA, and
SMBC came in seventh with 0.52% ROA.

2.2. Advantages of international banks when operating in China

- China is a country with great economic growth potential and a key market to
expand their businesses:
 Figure 17. Global and China GDP growth
(Source:World Bank)

Figure 18. Top countries by Nominal GDP as of 2022

(Source: The World Bank - Investopedia)

 China has the world's second-largest economy and a vast consumer base. China's
robust economic growth has led to increased investment activities and demand for
financial services. International banks can capitalize on these opportunities by providing
financing, investment banking, and advisory services to support Chinese businesses and
infrastructure projects. Operating in China allows international banks to tap into this
significant market and benefit from its growth potential.

- Innovation and technology advancements: China has witnessed significant

advancements in financial technology (fintech) and digital banking. International
banks operating in China can leverage these innovations to enhance their service
offerings, improve operational efficiency, and meet evolving customer demands.

Figure 19. Distribution of Fintech Enterprise by Segment in Financial Services in China

(Source:Mordor Intelligence)

- Cross-border business facilitation: Operating in China enables international

banks to facilitate cross-border transactions and support global trade. They
can offer services such as trade finance, foreign exchange, and international
payment solutions to facilitate business interactions between Chinese
companies and their global counterparts.

Figure 20 - 21.Mapping China's Trading Economy

(Source: howmuch.net )
2.3. Disadvantages of these banks when operating in China

- Regulatory challenges: China has a complex regulatory environment, and

international banks may encounter challenges in navigating the regulatory
framework. Compliance with local regulations, obtaining necessary licenses, and
adhering to reporting requirements can be time-consuming and resource-intensive.

- Intense competition: China's banking sector is highly competitive, with both

domestic and international banks vying for market share. International banks may
face stiff competition from well-established domestic banks that have strong
networks, customer relationships, and knowledge of the local market.
In China, the rise of Fintech is underpinned by China's e-commerce sector. It is
generally accepted that 2013 was Year One of China's Internet finance era, with
the blockbuster launches of Yu'eBao and WeChat payments. Other areas applying
Fintech innovation are third-party payments, wealth management and personal
finance. Chinese fintech is dominated by Alibaba Group Holding Ltd., Baidu, JD
and Tencent Holdings Limited. At the end of 2015, the market size of the country's
Internet Finance Industry was over 12 trillion RMB (1.8 trillion USD), largely
dominated by the payments sector. As a result, credit card payments, one of the
businesses targeted by foreign banks in China, encountered difficulties before it
could really take off, as more and more consumers China uses local third-party
payments without even going through credit card payments, especially in rural
areas

- Cultural and language barriers: Operating in China requires understanding and

navigating cultural nuances and language barriers. International banks may face
challenges in building relationships, understanding customer preferences, and
effectively communicating with clients and stakeholders.
 - Economic and market risks: Despite its strong economic growth, China's market is
not without risks. Factors such as economic slowdowns, financial volatility, and
regulatory changes can impact the operating environment for international banks.
Adapting to these risks and managing them effectively is crucial for sustained
success. Foreign banks are expected to encounter growth challenges in China over
the next few years, with the country's economy likely to remain stagnant until
2023, according to a Fitch Ratings report.
The rating agency noted that foreign banks' market share fell to just 1.4% of total
system assets at the end of 2021, increasing by only 0.5% in 2021.

After analyzing the operations of international banks in China, we selected the top 5
banks with the highest market share by GDP for detailed analysis:

List of 4 international banks with the highest market share by GDP:

1. Deutsche Bank

2. Citibank

3. J.P. Morgan

4. SMBC

3. Deutsche Bank
3.1. Formation history

When we discuss Germany, the banking and financial industry comes to mind.
Because this is Europe's economic powerhouse's strength. Deutsche Bank is one of them
and is regarded as the top representation both in Germany and globally. Even the pickiest
customers are satisfied with Deutsche Bank's service.

The biggest private banking firm in Germany is called Deutsche Bank, or

Deutsche Bank AG (German for German Banking Joint Stock Company). based in
Frankfurt am Main and was established in 1870. Being one of the top banks in the world
for capital transactions, we provide our clients services and solutions that meet
international standards.

3.2. Deutsche Bank Subsidiary in China

On September 18, the People's Bank of China (PBoC, or Central Bank) and the
China Foreign Exchange Administration held meetings with foreign financial institutions
and businesses. This was in the backdrop of Beijing's increased efforts to attract foreign
investment capital to aid in the nation's economic recovery.

As the economy recovers from the COVID-19 pandemic, China has made an effort to
draw in foreign investment because to weak international demand and a downturn in the
real estate market.

After raising its ownership to about 10%, China's HNA, a diversified

conglomerate, has overtaken investment fund BlackRock to hold the largest share in
Deutsche Bank. A report that was just released states that HNA presently owns 9.92% of
German banks. HNA acquired 4.8% of the bank's shares in March of this year, turning it
into a significant shareholder.

Meanwhile, Deutsche Bank is attempting to increase capital after suffering

numerous massive losses due to legal bills and fines.

History of Deutsche Bank in China

- 1870: Deutsche Bank is established in Berlin with the goal of fostering and facilitating
trade between Germany and other markets.

- 1890: Deutsch-Asiatische Bank established its principal office in Shanghai. Prior to

World War I, more branches were founded in China.

- 1899: The Shantung Railway Company was founded with support from Deutsche Bank
and Deutsch-Asiatische Bank.
- 1925 saw the reopening of Deutsch-Asiatische Bank's Chinese branches in Canton,
Tientsin, Hankou, Beijing, Shanghai, and Tsing-Tao. In 1945, with the end of World War
II, all branches were closed.

- 1974 saw the opening of Asia European Bank's first neighborhood branch in Hong
Kong, with further branches opening soon after.

- 1986: European Bank becomes Deutsche Bank (Asia).

- 2008 saw the official launch of Deutsche Bank (China) Co., Ltd., a 100% foreign-
owned subsidiary of Deutsche Bank AG. Deutsche Bank AG's branches and sub-branches
in Beijing, Shanghai, and Guangzhou were converted into matching branches and sub-
branches of Deutsche Bank China, which is headquartered in Beijing.

3.3. Customers of Deutsche Bank in China

With a global scale and providing diverse services. Positioned as one of the top
banks in the world, offering basic personal customer services, asset management,
corporate banking, and securities trading services. In Germany and a number of other
European nations, Deutsche owns franchises for extensive personal and corporate
banking services.

Within the asset management industry, there are three departments: - Private &
Business Clients (abbreviated PBC for "business and individual customers"). The PBC
division offers each individual customer a full range of services, including standard
banking, investment advice, and the best possible financial outcomes. More than 13
million consumers are currently being served in Europe. This division has now spread
beyond Europe with the opening of the first 8 Investment and Finance Centers in India in
2005.

- Private Wealth Management, often known as PWM (Private Wealth Management). The
PWM division focuses on high-net-worth clients, their families and select institutions
globally. This section offers comprehensive financial solutions, such as foundation and
philanthropic advice and estate preparation.

- Asset Management (often known as AM) provides services to both individual investors
and organizations. The Asset Management Division, a global service provider, provides
products to fulfill the requirements of our clients for stocks, bonds, and real estate
consulting services. Furthermore, AM provides tailored securities, real estate, and stocks.

- Global Markets (Global Currency Management Division) and Global Banking (Global
Banking Enterprise Division) are the two divisions that comprise the Corporate and
Investment Banking (CIB) industry.

- Global Markets, sometimes known as GM, is one of the top trading and sales companies
in the world, with expertise in securitization, derivative products, foreign currency,
bonds, speculative goods, and equity research, among other fields. As a result, this
segment is at the forefront of trading equities, fixed income, foreign currencies, and other
derivative goods.

Securities, investment trust services, worldwide trade finance, and global payment
account management are all part of the worldwide Corporate Banking (GB) sector.

3.4. Products and Services of Deutsche Bank in China

International standards are always met by the bank's extensive range of services.
Services can include:

– Business banking services;

– Securities trading;

- Paying through bank;

- Asset Management;

– Personal banking services;

– Buy and sell foreign currencies;

– Deposit products;

- Currency market;

With its position, it is evident that German joint stock firm Deutsche Bank is one
of the top destinations, particularly for individuals interested in Germany and the banking
and financial industry.

3.5. Operating situation of Deutsche Bank in China

Like other investment banks, Deutsche Bank realized early on that relationships
were crucial to securing deals in China, especially with the Communist Party elite who
largely controlled country's assets.

Joseph Ackermann, who led Deutsche Bank from 2002 to 2012, turned to Lee
Zhang, who runs the Beijing office of rival Goldman Sachs, to help catch up. When Mr.
Zhang joined Deutsche Bank, he quickly sought to help the bank get a seat at the
negotiating table for some of the biggest public offerings of Chinese state-owned
companies. By 2006, Deutsche Bank played a leading role in the initial public offering of
Industrial and Commercial Bank of China, the world's largest at the time. Not only did
this give the bank a bargain, it also gave it new bragging rights in China. By 2011, it
topped Bloomberg's ranking of banks managing initial public offerings in China and Asia
outside Japan.

The business offers trade financing, custody, cash management, investment asset
management, securities trading, and other associated services. Services are offered in
China by Deutsche Bank (China).

Deutsche Bank established a Fintech laboratory in Shanghai- (Yicai Global) September

11, 2019 Germany's Deutsche Bank established an innovation center called Blue Water
Fintech Space in Shanghai to provide better digital services to corporations in China, the
Frankfurt-based lender said in a statement.
4. Citibank
4.1. Formation history

Citibank (formerly City Bank of New York) was chartered by the State of New
York on June 16, 1812, with a capital of $2 million (approximately $39.5 million in
2021). In September 14, that year, the bank opened for business, serving a group of New
York merchants, and Samuel Osgood was elected as the company's first President.

The purchase of US overseas bank International Banking Corporation in 1918

aided it in becoming the first American bank with assets exceeding $1 billion. During the
US occupation of Haiti and the bank's income from Haiti's loan debt related to the Haiti
indemnity controversy, the bank earned some of its largest gains in the 1920s due to debt
payments from Haiti, eventually becoming the world's largest commercial bank in 1929.
As it grew, the bank became a financial services pioneer, offering compound interest on
savings (1921), unsecured personal loans (1928), customer checking accounts (1936),
and the negotiable certificate of deposit (1961).

In 1984, John S. Reed was appointed CEO, and Citi became a founding member
of the CHAPS clearing house in London. Citibank would become the largest bank in the
United States and the world's largest issuer of credit cards and charge cards under his
leadership over the next 14 years, expanding its global reach to over 90 countries.

4.2. Citibank Subsidiary in China

Citi opened its first office in China on May 15, 1902, in Shanghai. Citi was one of
the first international banks to establish a local presence in China in April 2007. Citibank
(China) Co Ltd is a locally incorporated entity that is wholly owned by Citibank N.A.
Citi is now a leading international bank in China, with a presence in twelve cities.

Citibank has been more interested in M&A than joint ventures in order to expand.
Citibank China's operating income more than doubled to RMB 2.2 billion Yuan in 2007,
and its net income increased to RMB 665 million. Furthermore, it is one of only five non-
Chinese banks that can issue UnionPay debit cards in China. In collaboration with
Shanghai Pudong Development Bank, it also issues credit cards.

4.3. Customers of Citibank in China

Citibank serves a wide range of corporate clients in China, including multinational

corporations, domestic businesses, and state-owned enterprises. The bank offers services
such as corporate and investment banking, trade finance, foreign exchange, and treasury
services to support the financial needs of businesses operating in China. Besides,
Citibank may engage with other financial institutions in China, including local banks,
insurance companies, and asset management firms, for various financial transactions,
including interbank lending, trade finance, and foreign exchange services.

Furthermore, it may provide financial services to government and public sector

entities in China, such as central and local government agencies, municipalities, and
government-owned enterprises. The bank may offer wealth management and private
banking services to affluent individuals and families in China, including investment
advisory, estate planning, and other personalized financial services, those customers are
named High-Net-Worth Individuals (HNWIs) and Ultra-High-Net-Worth Individuals
(UHNWIs).

Depending on the bank's operations and presence in China, Citibank may also
serve retail banking customers, providing services such as savings accounts, mortgages,
consumer loans, and credit cards. Last but not lease, for multinational corporations with
operations in China, Citibank can provide banking and financial services to support their
cross-border activities and trade finance needs.

4.4. Products and Services of Citibank in China

Citibank offers a range of financial products and services in China. These services
catered to various customer segments, including corporate clients, financial institutions,
and individuals. Keep in mind that the availability and specifics of these services may
have evolved since then. Our group will list some of the typical products and services
provided by Citibank in China:

● First, corporate and investment banking:

- Advisory services for mergers and acquisitions (M&A).
- Debt and equity capital markets services.
- Structured finance and project finance.
- Trade finance and export financing.
- Corporate treasury services.
● Second, global markets:
- Foreign exchange services, including currency hedging.
- Interest rate and fixed income products.
- Commodity derivatives.
- Equity derivatives and structured products.
● Third, asset management:
- Asset management services for institutional investors.
- Investment funds and strategies tailored to the Chinese market.
- Discretionary portfolio management for high-net-worth individuals.
● Fourth, wealth management:
- Private banking services for high-net-worth and ultra-high-net-worth individuals.
- Personalized investment solutions.
- Wealth planning and estate management.
● Fifth, securities services:
- Custody and fund administration services.
- Securities lending and borrowing.
- Post-trade services for institutional clients.
● Sixth, treasury and cash management:
- Cash management solutions for corporate clients.
- Liquidity management services.
 - Payment and collection services.
Along with that, there are various services and products such as: Compliance and
regulatory services, global transaction banking, retail banking, trade services, institutional
services, etc.

4.5. Operating situation of Citibank in China

Compared to domestic banks where business growth is mainly driven by lending,

Citibank (China) focuses more on promoting cross-selling activities through its group’s
global network. As a result, its loan book is relatively small compared to mainstream
domestic banks.

Figure: Citibank (China)’s market share

Citibank (China)'s wealth management services are crucial to its retail business. Its
wealth management products connect affluent Chinese people to international investment
opportunities. Its overseas wealth management business reached 22.5 billion RMB at the
end of 2019, which can be show in the following figure:

Citibank (China) has a much higher capitalization than the Chinese industry
average. Its high capitalization is due to a large low-risk weight investment portfolio
primarily comprised of treasury bonds, a small loan book, and healthy profitability. It has
never been required to pay a dividend by its parent. As of the end of 2019, its reported
regulatory tier-1 capital adequacy ratio was 19.42%, significantly higher than the industry
average of 11.95%. The bank's capitalization is anticipated tp remain strong in the near
future.
 Citibank (China) has maintained good asset quality metrics due to its high-quality
client base and prudent lending standards. As of the end of 2019, it had a non-performing
loan ("NPL") ratio of 0.47%, which was significantly lower than the industry average of
1.86%. We believe its credit risk classification practices are more stringent than the
industry average, and we anticipate that the migration of its special mention loans
("SML") to NPLs will be significantly lower than the industry average. The significant
difference between its overdue loan ratio (0.67% as of the end of 2019) and NPL+SML
ratio (3.92%) demonstrates the strictness of its loan classification practices.

Citibank (China)'s investment and interbank operations involve very little credit
risk. Over 94% of its bond investments were rated "A" or higher by major international
rating agencies (S&P Global Ratings, Moody's, or Fitch) as of the end of 2019. Major
international rating agencies rated more than 80% of its counterparties "A" or higher.
Citibank (China) benefits from its parent company's global risk management framework,
particularly in terms of risk modeling and risk limit management. We believe Citigroup
has implemented sound risk management in China.
 Citibank (China) primarily funds its operations with customer deposits, with only
limited use of wholesale funding. As of the end of 2019, 89% of its total liabilities were
customer deposits, with wholesale funding accounting for the remaining 6%. We consider
its deposit base to be sticky because a large portion of its deposits are associated with its
treasury and trade finance services, which tend to be stable areas of business. Its deposits
are sufficient to fund its lending operations, and its loan-to-deposit ratio was 48% at the
end of 2019.
 Citi's exposure to China is reflected not only in the operations of Citibank (China),
but also in other parts of its network, particularly Hong Kong SAR and Singapore. Its
direct exposure to China was 19 billion USD at the end of 2019, and its exposure to Hong
Kong SAR was 49 billion USD. Within Citigroup, Citibank (China) has a small presence.
It accounted for only 1.8% of Citibank N. A.'s total assets as of the end of 2019, and its
net income in 2019 was only 1.7% of that of its parent. However, we believe it has
understated its contribution to its parent in its own financial statements, which do not
fully reflect the value of its cross-selling activities.

5. J.P. Morgan
5.1. Formation history

Hartford, Connecticut was the place of John Peirpont Morgan's (J.P. Morgan) birth
in 1837. He is undoubtedly known as the "King of Steel" to everyone on the planet.
Under the strong influence of his father, Morgan started his career in banking in 1857 and
quickly established his financial empire.
 The fact that JP Morgan is regarded as the financial industry king is not accidental.
Being an economic mogul, he has become wealthy because to the contributions made by
the banks network he owns and promotes, which has helped the US economy thrive.
globe around the end of the 1800s.

Because we wish to take advantage of the J.P. Group's reputation to add a new
development step to our journey. Morgan, so J.P. Morgan approved $33 billion in of
agreements when Chase Manhattan Group formally merged with it in 2000.

The sixth-biggest bank in the US, Bank One, merged shortly after and joined the
JPMorgan Chase Group. Following the merger, the combined assets of the new company
reached 2,476.99 trillion VND in USD, ranking JP Morgan Chase Bank as the sixth-
biggest bank globally and the largest in the US. This is the largest merger in American
history since its inception.

5.2. J.P. Morgan Subsidiary in China

The Industrial and Commercial Bank of China (ICBC) is the largest bank in the
world and the leading market unit in China. In 2019, JPMorgan Chase & Co. declared
that it would "dedicate all resources" to the Chinese market. Currently the largest bank in
the world, ICBC is a state-owned bank in China that primarily serves Chinese clients.
The biggest bank in the West is prepared to take on the biggest bank in China.

Even if China is taking steps to liberalize its financial sector, real success won't occur
until businesses like JPMorgan are able to take on the market's dominant state-owned
banks.

This bank already has holdings in China worth close to 20 billion USD, and it
wants to grow even more. Furthermore, Chinese authorities have given JPMorgan
permission to permit full ownership of securities firms operating within the nation.
Maintaining a strong reputation in China will help JPMorgan as it applies for further
licenses.
 5.3. Customers of J.P. Morgan in China

By using artificial intelligence (AI) to identify fraud, JPMorgan has assisted

managers in seeing irregularities early on that could later turn into deadly weaknesses.
Each year, this system finds potentially problematic transactions totaling up to $150
million, mostly in the retail industry. In order to manage credit and assess risk during the
COVID crisis, the bank also developed the JPMorgan Market platform and employed AI
technology.

Data experts may now securely and swiftly transmit extremely sensitive internal
data thanks to JPMorgan's expedited development of its OmniAI cloud technology
platform. The platform development team is led by a renowned specialist who was
previously employed by Google.

The well-known financial company JPMorgan Chase is creating a service similar

to ChatGPT to give clients investing advice. CNBC reports that the financial services
company has filed for a patent for a product known as IndexGPT. According to the filing,
IndexGPT will "select and analyze securities appropriate to customer needs."

5.4. Products and Services of J.P. Morgan in China

There are 4 primary services that J.P.Morgan provides including:

+ Wealth Planning and Advice

+ Investing
+ Banking
+ Lending
6.5. Operating situation of J.P. Morgan in China

JPMorgan recently revamped its business in China, after becoming the first
foreign bank to receive approval from the Chinese Communist Party to fully own its
business in China. China. In 2022, JP Morgan announced that its top investment banking
executive in China, Mr. Houston Huang, will leave the position effective April 15. Mr.
Huang will be replaced by Mr. Lu Fang, a former official who worked for more than a
decade at the China Securities Regulatory Commission. This change of head is
considered a step to appease the Beijing government and strengthen JPMorgan's position
in China.

J.P. Morgan has broadened its commercial banking operations by offering services
to Chinese medium-sized businesses that assist them in breaking into foreign markets.
Financial institutions now have excellent chances to help both Chinese businesses
growing internationally and international businesses operating in China. Furthermore,
China's financial openness contributes to J.P. Morgan's consistent and rapid growth there.

Mr. Leung claims that in the midst of China's capital markets opening, J.P. Morgan
is operating companies in the areas of corporate and investment banking, securities
services, commercial banking, and asset management. This group has two branches, one
of which being J.P. Securities Company. J.P. Futures Company and Morgan Securities
(China). The first fully foreign-owned business in China is Morgan Futures.
Figure 17. Total returns (including dividends reinvested) to 30th September 2022
(Source: jpmg)
Figure 18. Share price (discount)/premium to cum income net asset value (‘NAV’) per
share (Source: Morningstar)
 Figure 19. Long-term performance for years ended 30th September 2022
(Source: Morningstar)

Figure 20. Statement of Comprehensive Income

(Source: Morningstar)

China's active dynamic bond and equity markets are accessible to JP Morgan. For
instance, the China Fund of JPMorgan Fund. Sixty-seven percent of assets must be
invested in the stocks of businesses with their headquarters or primary business
operations located in China, according to the investment policy. By way of the China-
Hong Kong Stock Connect Program, the RQFII and QFII programs, and participation in
notes, the sub-fund may allocate up to 40% of its assets directly to China A Shares; the
remaining 20% may be invested indirectly. A restricted number of securities or industries
may occasionally be the sub-fund's primary focus, and it may invest in small-cap firms.

To obtain indirect exposure to the underlying Chinese enterprises, the sub-fund has
the option to invest in securities based on the VIE structure. Up to 10% of the SPAC's
assets may be invested by the sub-fund. A minimum of 51% of assets are allocated to
businesses that, according to the Investment Manager's exclusive ESG rating
methodology, use third-party privacy and/or data and have favorable environmental
and/or social attributes and adhere to good governance standards.

To handle registration, cash withdrawals, current and special payments, up to 20%

of net assets may be placed in ancillary current assets, up to 20% of assets may be placed
in deposits with credit institutions, money market funds, and money market instruments.

For short-term defensive needs, up to 100% of net assets may be placed in

auxiliary current assets, provided that extreme market unfavorability is demonstrated.
Figure 21 .JPMorgan Funds Combined Statement of Net Assets (China)

(Source: https://am.jpmorgan.com)
 Figure 22.JPMorgan Securities Lending (China) at 30 June 2022

(Source: https://am.jpmorgan.com)

According to news from Tradewinds, the JP Morgan financial empire is continuing

to expand its fleet with new building orders. This American bank has just ordered the
construction of two more 50,000 dwt oil product ships at Guangzhou Shipyard
International, China (GSI). This deal increases the total number of ships using dual fuel
(methanol and fossil fuels) that they ordered to build at the state-owned GSI shipyard to
4. (“JP Morgan lifts product tanker order tally in China”)

6. Sumitomo Mitsui Banking Corporation (SMBC)

6.1. Overall introduction

A key component of the Sumitomo Mitsui Financial Group (SMBC Group), with
its headquarters in Tokyo, is the Sumitomo Mitsui Banking Corporation (SMBC). We put
our customers first and offer seamless access to, from, and within the Asia Pacific region,
having been founded in 1876 on the foundation of our rich Japanese heritage.

With assets of over 238,700 billion and strong credit ratings across our global
integrated network, which spans 39 countries and territories, 15 of which are in this
region, SMBC is one of the biggest Japanese banks by assets. Our multi-franchise
strategy in Indonesia, India, Vietnam, and the Philippines enables us to serve individual
customers and corporate and institutional businesses across the region. To meet the needs
of our clients, we closely collaborate as one SMBC Group to provide personal, business,
and investment banking services.

SMBC is dedicated to building a society where the current generation can experience
economic prosperity and well-being and pass it on to subsequent generations by
integrating sustainability into our strategy and daily operations.

6.2. Formation history

Figure 23. Diagram of SMBC Bank formation

(Source: https://www.smbc.co.jp/)

● 1590: The Sumitomo family business opens

Masatomo Sumitomo, a Kyoto native, established an industrial capital integrating copper
mine development, refining, and export by starting a copper-refining company.

● 1673: The Mitsui family business opens

In Edo, modern-day Tokyo, Takatoshi Mitsui opened Echigoya, a high-volume kimono
retail store that is possibly the oldest and biggest in terms of location and personnel.

● 1674 - 1875: The Mitsui and Sumitomo families expanded capabilities

In order to become two of the top business names in Japan, Mitsui and Sumitomo
improved their capabilities in manufacturing, finance, transportation, and imports and
exports.

● 1876: Mitsui Bank established

The Mitsui family founded Japan's first bank in the private sector, Mitsui Bank.

● 1895: Sumitomo Bank established

The Sumitomo family established the Sumitomo Bank in Osaka with a one million yen
capitalization.

6.3. SMBC Subsidiary in China

Sumitomo Mitsui Banking Corporation founded Sumitomo Mitsui Banking

Corporation (China) Limited (Capital: 7,000 million yuan) as a wholly-owned subsidiary
of SMBC.

SMBC had taken the necessary actions to get ready for the establishment of the
subsidiary after receiving approval of its application to start planning for the
establishment of a wholly-owned subsidiary. Sumitomo Mitsui Banking Corporation
(China) Limited has been given the final go-ahead to acquire SMBC's six Chinese
branches (Shanghai, Beijing, Tianjin, Suzhou, Hangzhou, and Guangzhou) and two sub-
branch locations (Tianjin Binhai and Suzhou Industrial Park).

China is one of the most significant markets in the world for SMBC. SMBC will
continue its efforts to offer customers more comprehensive services.

6.4. Customers of SMBC Subsidiary in China

● Individuals
● Small and medium-sized enterprises
● Large corporations
● Financial institutions
● Public sector entities
6.5. Products and Services of SMBC Subsidiary in China

SMBC offers an integrated suite of cash management, trade, and financial supply
chain solutions to meet the various needs of corporations. SMBC has a strong presence
throughout Asia Pacific.

Some significant products and services of SMBC:

● Loan syndication
 ● Project & export finance
● Sustainable finance
● Transaction banking
● Structured trade finance
● Yen clearing
● M&A and sponsor finance
● Real estate finance
6.6. Operating situation of SMBC in China

Figure 24. Number of customers subscribed to the online banking service SMBC Direct
of Sumitomo Mitsui Banking Corporation from 2019 to 2023
(Source: https://www.statista.com/)
 Figure 25. Principal SMBC Overseas Subsidiaries
(Source: https://www.smfg.co.jp/)

7. Conclusion
Overall, international banks in China occupy different market shares, depending
on the size of the bank and the services they provide. China is a major market for
international banks to expand their operations and a nation with significant economic
growth potential. A growing number of high-quality Chinese customers have significant
economic value for these international banks. Foreign banks' entry into China will be
accompanied by international operations, mature management models, and advancements
in financial technology. The development of domestic banking efficiency will be aided by
increased external competition and market competition among Chinese banks.
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