Collection: Li Lu - #11 'Banking in China Explained'


Video Link: https://youtu.be/AYQAgYlOooY


In this episode, Li Lu talks about the financial service sector in China and what makes it different from the United States?


In this episode, you’ll learn:

  • Difference between China and United States banking.

  • Investing is China's banking sector is not for everyone.

To check out all Collection: Li Lu <click here>

 

[Transcript]

(Source: https://youtu.be/FiHrWy2jGbA)

BRUCE GREENWALD 00:00

Now, let me ask another question in that connection.


I mean, the thing about a service economy is that services are overwhelmingly locally produced and consumed. There are very few global universities, for example, there are very few global high schools, very few global hospitals. That means that typically if you look at developed economies like the United States with big service sectors, the firms which tend to be local – the service firms that tend to be local – tend to be locally financed.


So I assume you know that local banks in the United States are much more profitable than the big global banks. Do you see a comparable trend developing in China that you can take advantage of?


LI LU 00:43

Some yes and some no. I wouldn’t say that the local banks in the US...


BRUCE GREENWALD 00:50

No, I’m just thinking in terms of local experts within China and local service businesses, that would include, of course, local banks.


LI LU 00:59

Yeah, well, they tend to really know their local area.


But the Chinese regulation in banking is slightly different. So there are only roughly about 15 banks that really have the mandate of being able to take deposit on a national basis. And all the rest of the financial institutions are able to really take deposits in a very, very small, well-defined local region. Whether they’re a town, or villages, or the cities, etc. And so it is a heavily, heavily regulated business.


And so that really gives them almost an oligopoly type of a status in terms of taking deposit, which is very important and of course, in terms of the source of capital. So that dynamic is a slightly different than the United States, for example.


That the license ability to really be able to open a bank is much, much more relaxed in the United States than in China. As a result, basically the dynamics of the larger national versus local or regional banks and other financial institutions, are more driven by basically the business dynamics and market dynamics. And this is very different than in China. It is driven first and foremost by the regulation regime.


And so, that makes the comparison of the banks really quite different in China than the United States.


BRUCE GREENWALD 02:41

So somebody investing in banks in China have to be an expert in Chinese regulation?


LI LU 02:47

Absolutely.


BRUCE GREENWALD 02:50

A specialist? (Laughter)


LI LU 02:53

Yes. If you decided to invest in anything, I recommend you better become the most knowledgeable specialist on the planet – (Laughter) – before you really interested in really invest in it and hold it through the ups and downs and the thick and thins.


And if you do understand them and they are good, it is far more profitable to own them over the long period of time.

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