Early guidance on banking business scope expansion possible in China

In the past five years, China banks have reduced their reliance on credit business, as demonstrated by the non-interest income contribution to total revenue for the overall sector rising to 24.6% in 2Q15 from 20.8% in 1Q11. 

Nonetheless, this is still markedly lower than some banks in the US, where the proportion of non-interest income is as high as 50%. The ongoing interest rate liberalisation in China could provide more incentive for banks to diversify their sources of revenue and further improve their non-interest income contribution.

"The 13th FYP is expected to include early guidance on the scope for expansion of banking business. There are already initial signs that such activity has been tested by the regulator, for example, local media (Hexun, 17 July 2015) reported that BOCOM had been given approval by the local Jiangsu CSRC to acquire a 33% stake in Huaying Securities", says Barclays. 

The two banks have not commented on this information. If the BOCOM-Huaying case were successful, it could potentially encourage more M&A activity, allowing banks to expand their business into other financial sub-sectors. 

However, such a diversified business model may require these businesses to operate on a stand-alone basis (i.e. as a separate legal entity) with a separate licence and proper information barriers in place, to prevent potential risks that could threaten the stability of the overall banking system.