The China Banking "Monopoly" Comment: What We Expect Moving Forward

Tags: banking, china, government

The comments made last Thursday by Chinese premier Wen Jiabao about the monopolistic nature of lending in the mainland points to significant changes that are afoot in China's financial services, and the many more significant changes that are to be anticipated.

Last week's brief-but-meaningful comments alluded to an issue that has gained much traction of late: that Chinese borrowers, especially small and mid-sized companies, have no choice but to deal with the large-bank "monopoly"- primarily the Big Four state-owned banks. The premier's "monopoly" statement also brought to the surface the issue of "super-profits"- that guaranteed interest margins in an era of hyper-lending have created record profits that seem out of touch with China's slowing economy. 

(We point out however that "super-profits" is a term that we at IDC Financial Insights have discussed to some extent in previous reports, even as the trend has until now been largely brushed aside within Chinese banking.)

What then can we expect from different types of players in China's banking sector, especially in light of the premier's comments? 

First, the Big Four. In the long term, the Big Four will have to pay attention to the non-lending parts of their business, if only to show that their super-profits do not necessarily come because of the guaranteed lending margins. To be fair, these banks have recently scaled up their non-interest-based activities, especially in two main areas: yuan settlement services and bancassurance. We expect the Industrial and Commercial Bank of China (ICBC), China Construction Bank (CCB), Agricultural Bank of China (ABC) and Bank of China (BOC), to further intensify efforts in these two areas. Fifth-ranked Bank of Communications, perennially receiving special mention because it can be lumped together with the Big Four, will also push for further diversification of its business. The bank is acquiring a two-third stake in Shanghai Securities, which not only sets a precedent of a domestic commercial bank owning a local brokerage, but also sets the course for more involvement by the Big Four in the mainland's equities market.

Mid-sized and small-tier players will prepare to scale up their lending business, especially if loan targets for these city-based banks will be increased and regulations related to their lending activities are relaxed. We expect new lending in China to grow by about 8% this year - a rate that is seen to balance concerns of overheating on one end, and on the other, ensuring continued growth despite weak global conditions. Ordinarily, a huge part of lending growth would be expected out of the largest banks. Moving forward, the small-tiers would have to carry more than their fair share.

China's bank regulators are seen to relax new capital adequacy requirements as well as postpone implementation of more stringent capital and liquidity guidelines to reduce pressure on bank balance sheets - good news especially for the mid- and small-tier banking segments. This will also ease pressure for banks in these groups to merge or go for public offerings.

Foreign banks will have to step up their game, and finally play a more significant role in Chinese banking. To this end, Wen has been recently quoted to have stated that China would further open up its financial sector to the outside world. This rhetoric is matched by recent moves by Chinese regulators, which include more local banking licenses issued, liberalization of branch network expansion, and last month's moves to raise the quota for stock investments by qualified foreign institutional investors (QFII).

We note that foreign participation in China's banking sector is still weak - with foreign institutions accounting for just about 1% of total assets in the system. In recent years, foreign banks, particularly Western players have been seen to waver on their commitments to the newly opened Chinese banking market - examples here include Bank of America's gradual reduction of its stakes in China Construction Bank (CCB) and complete divestments by Goldman Sachs (in Industrial and Commercial Bank of China [ICBC]) and UBS (in Bank of China). The China Banking Regulatory Commission recently reported that Shanghai's foreign banks (accounting for 83% of total foreign assets in the mainland) slashed revenue growths on the back of lower loan growth projections. In an earlier report (see Business Strategy: Mergers, Acquisitions, and Consolidation in Asia/Pacific Banking - Where Are the Hot Spots? IDC Financial Insights #FIN231313, November 2011), we commented that contributing to these reduced targets is the rule mandating that all banks in the mainland meet loan-to-deposit ratios of 75%. This has put further urgency on deposit-taking activities that most of the 40 locally incorporated foreign banks already struggle with. Naturally, foreign banks reacted by slashing loan targets instead).

However, without a lot of home market distractions, it is the segment of banks that originated from the Asia/Pacific region (OCBC, DBS, UOB, ANZ Bank, Commonwealth Bank of Australia and the Taiwanese banks) that seems to have become more aggressive in the mainland. The group in general is seen to open up more branches - and more quickly, and pursue local business more intensely.

Finally, the technology investments implications. We do not expect changes to the relative priorities given to specific technology functional areas - in a high-growth market like China, all areas received their fair share of attention from banks anyway. We believe this to be true, except for the increasing profile of technology investments in credit risk management systems, especially within the mid-tier banking segment. These include spending on a wide variety of solutions for credit origination, credit scoring, document and credit line management, policy decisioning, portfolio, and counterparty risk management. These modern risk management systems will add powerful capabilities to the core systems being run in the second tier of banks. Hopefully, these modern core-plus-modern risk systems will allow these banks to compete more favorably against the Big Four players - and report more impressive profitability levels in the process.

New Technologies will Help Singapore Government Mature Faster

Tags: government, public policy

IDC Government Insights has created a maturity model that describes the various stages a government must transcend to become a smarter government. This model studies 4 stages for citizen participation, information transparency and collaboration to deliver citizen services as displayed in the figure below.

Singapore and its government are very actively involved in a process to continuously self-improve and have proven not to shy away from being the pioneer when it comes to embracing new developments and technologies. Singapore is highly regarded in the region and often provides a case study other governments can base their strategy on. Its highly structured and efficient processes are the key strengths but also the area where the biggest improvements can be made. Such well-defined environments provide a solid base for a highly functional and facilitating government. Unfortunately, it also leaves very little room for individual decision making and dealing with unexpected scenarios and/or exceptions to the rule. As Singapore continues to seek the highest level of smart government maturity, it would benefit strongly if the government managed to keep some of the decision-making responsibilities and situation-dependent requirements at the level of the officials dealing directly with citizens. The smarter and more technologically advanced government-to-citizen processes get, the heavier it will rely on these citizen-facing government people to understand and judge the exceptions and outliers the automated process cannot capture. 

Citizen development
Where a government conversation in the past would consist of a letter in the mail to educate the citizen, it is now a dialogue or even a collaboration to really address needs and concerns in the community. The proposed SOPA legislation in the USA is another great example. 'The internet' brought together such a large group of citizens expressing their concerns regarding this legislation, that most politicians and companies previously openly supporting the proposal changed their position to align with the view of the people they represent/ sell to. At the theoretical highest level of smart and mature governments, the government representatives and citizens would have collaborated to create a proposed legislation that achieves the goal of the government within the limits of citizen acceptation. Specifically for Singapore, it has nurtured its citizens to where they are now and is likely to see their citizens steadily asking for more responsibilities and influence to contribute to its future growth. This may well mean that there will be less rules and regulations to control citizens, as they are being replaced by the community responsibilities and the collaboration efforts between government and citizens. 

The new technology evolution
A number of important government departments have created avenues for citizen feedback and dialogue. These efforts will continue to expand, embracing new technologies and means to communicate. Citizens tend to focus their newfound influence on scrutinizing the government on details that affect them personally. As long as both parties invest in this reinvented relationship there will be an evolutionary path to true citizen-directed government. Singapore has taken a number of the necessary steps to get that process started and created the right environment for that evolution to take place. So far we haven't seen much activity from the local development community in Singapore to really leverage the information shared freely by the government. In contrast, the NEA has done a great job creating its own mobile application for citizens. They deliver critically important information there, such as air quality and dengue threat areas. This application has the ability to incorporate citizen-provided information, allows feedback and shares an event calendar to enable a face-to-face dialogue.  Most of the relevant department information for citizens has found its way online and is now easily accessible. A number of forms and processes have found their way to an online format as well much to the convenience of its users. It is not always clear when the online process can be used and when the traditional process still has to take place. This is one of the challenges of the transition through these stages. The biggest improvements will come when citizens find an online one-stop-shop for the process they need, even if that process involves multiple government departments. Especially the G-Cloud initiative in Singapore will have a big impact on how easily departments can collaborate. 

Social media
Social media are still relatively new and there are very few best practices available to show governments how to get the most out of social media in a safe and secure fashion. In fact, the developments and learnings are still coming in at such a high pace that previous best practices might not be applicable anymore. Citizens might be satisfied initially with any attempt to embrace new media, but that sentiment turns to scrutiny very rapidly. In order to get the most out of social media in a secure fashion, there will be social environments solely created to interact between government departments. Separately, there should be a strategy for a (cautious) presence accessible to citizens where the learning curve can start, but also where damage control is relatively easy. I'd say the main challenge is to create an environment that is highly stimulating for dialogue and collaboration while avoiding undesirable consequences of that dialogue. Communicating via social media isn't always rich in context and misinterpretations or poor phrasing can go viral among citizens at a high pace to a large audience. McDonald's recently found out the hard way that it is very easy to become a worst practice. They created a Twitter hashtag to share McDonald's stories, intended to positively highlight the stories of its suppliers that contribute to their experience. Maybe McDonald's was hoping to attract people's happy messages about the restaurants at a central location, but instead they attracted the attention of animal rights activists and a wide variety of consumers sharing their worst experience. Within 2 hours they withdrew the hashtag as a damage control measure, but not before they became the worst practice example very publicly. On the bright side, they responded relatively fast to an uncontrollable tweetjacking situation. From a government CIO perspective though, if McDonald's was a government agency there would have been a lot more negative impact and perhaps permanent damage to the evolution in citizen-government collaboration. 

Technology and government requirements mismatch
Unless it is an internal government tool, especially created for that purpose, the various commercial tools and apps are simply not built to facilitate the unique and specific needs of government officials. Maybe these new variations compare well to how governments handle email. There are rules and guidelines for communication, some features will be disabled to keep information and the network secure, different levels of authority with different rights have been defined. Most of these new communication means are offered as services and cannot be implemented in a customized fashion appropriate for government usage. IT leaders will be tempted to block all these new services until they have defined the behavioral guidelines and created some level of control over what individuals can and cannot do. 

New technologies are high impact, but not huge change catalysts
Social media and mobile applications are a very welcome addition to e-government technologies and tools. Just like the fallback scenario of physical locations for online processes needs to co-exist for a long time, these new tools will not replace the existing scenarios. Citizens benefit significantly though, as they get more options to address their needs. Some savvy users will come to rely very heavily on these new technologies while others won't even have access to them for a long time to come.  

21st Century Education in the Emerging Markets

Tags: asia/pacific, government

The Intersection of Digital Education: McGraw-Hill and Blackboard Partnership

Tags: government, innovation

Blackboard has released a new version of a web-based learning management system that incorporates media-rich content and assessment engine from McGraw-Hill.  According to Doug Hughes, director, Digital Partnerships, McGraw-Hill Higher Education, “The Blackboard and McGraw-Hill partnership brings together two leaders in education technology to improve the classroom experience for students and faculty.”

I recall that just a few years ago, I made a trip to the US to explore trends and best practices in the digital textbook market that can be brought to the public education sector in Singapore.  At that time, textbook publishers like Thomson, McGraw-Hill and O'Reilly had already seen the potential in the digital education content space, and were experimenting with proprietary delivery platforms, developed around their content offerings.  However, at that point, learning management systems were torn between investing into content to supplement the learning process, as opposed to further enhancement of platform capabilities.

The publishing industry still faces challenges in flexible digital media delivery and copyrights protection, and continues to grapple with the possibility of the digital print crippling the paper print business. Yet, high costs of print, demand from educators to procure modular content, and the upside of the speed of adoption to a wider international market have thrust publishers into the digital course.   The Blackboard and McGraw-Hill collaboration is an elegant approach that allows both companies to focus on their core competencies enhancing their product offerings.   

Besides content, other education trends that are driving a paradigm change in the delivery of education technologies are:

• 21st Century Teaching Paradigm. Expectations of education have gone beyond pure knowledge transfer from teachers to students as employers expect graduates to be ”industry-ready” and equipped with a full range of skill sets ranging from communications to teamwork to problem solving when they join the workforce. Educational institutions need to remodel their teaching practices to incorporate the development of 21st century learning skills, while adapting to the different learning behavior of the new generation of students.
  
• Global, Virtual Education. At the same time, educational institutions have to provide better services to meet the demands of an increasingly global student community, where students expect to be reached out to regardless of physical location. Educators today can better leverage wireless Internet connectivity, elearning applications and Web services, and cloud applications to provide universal access of learning resources and applications to the student community.
  
• Mobility. Increasing affordability of basic computing devices made possible through 1:1 computing initiative is now common among many higher learning institutions.  Of course, one must not forget Apple's significant market share in education end users. The unstoppable move toward greater mobility has certainly not slowed down with the introduction of iPad.  

What these trends and the McGraw-Hill and Blackboard collaboration mean is that campuses are now provided the option of a simple 1-stop shop for rich media content. Day-to-day courses can now be delivered with the added convenience of collaboration, access and workflow management of assignments. Educators can also assess their students work regularly on the same platform. While this is pretty good news, educational institutes also need to be conscious of the impact on the network capacity demanded by such rich media intensive platforms.   What's next for digital textbooks?  I'm still hoping for to see a solution that allows me to access modular chapters in textbooks from multiple publishers. 

Cost Management Continues to Rank High on the Agenda of APEJ Public Sector in 2011

Tags: cloud computing, economic crisis, economic stimulus, government, innovation, public policy

In our latest report, “IDC Government Insights Asia/Pacific (Excluding Japan) Public Sector 2011 Top 10 Predictions”, we identified the top 10 predictions for 2011 that will heavily influence the direction and magnitude of IT investment of APEJ public sectors this year.

Although the APEJ economy has emerged noticeably stronger in the last few months, the public sector will be continuing its search for products and services that provide the best bang for the buck to better manage spending in 2011. Governments in the region are expected to channel their IT budgets to initiatives that give them the best deal for the dollar in four areas: operational efficiency, business-IT alignment, risk management and citizen-centricity.

In 2011, optimistic sentiments will be propelling the APEJ economy forward, transforming it to a market with tremendous growth potential. We believe this will change the global economic dynamics into one that is "multipolar".

In recent years, the rollout of various economic stimulus packages in the region have greatly increased infrastructure spending in the public sector and brought about notable transformations in the information and communications technology (ICT) landscape. This has led to advanced economies opening themselves to competition in ideas and experience from rising markets.

To create and cluster “hot spots” for the technology industry, APEJ governments are increasingly providing the soft and hard national infrastructure to create sustainable cities. This includes creating a critical mass of advanced knowledge sources (universities, and advanced public and corporate research labs), and attracting venture capital investments, entrepreneurial talents, knowledge workers, specialized professional services and sophisticated end users. Governments are also empowering institutions with capabilities to enforce intellectual property rights.

 To cope with progressively more borderless and collaborative business environments, APEJ public sector organizations need to achieve functional ICT integration and operational transformation agility.

Here are the highlights of the report:

• As the world economy evolves into one that is “multipolar”, the APEJ public sector is expected to surge ahead with a strong 7.1% year-on-year (YoY) projected growth in 2011.
  
• Governments in the APEJ region are increasingly driving sustainable economic growth within their jurisdictions instead of outsourcing. Lately, IDC Government Insights notices that there has been a push for IT insourcing/backsourcing.  
  
• The birth of social analytics will bring about greater intelligence into the public sector decision making process and Web 2.0 engagements. Coupled with the growth of personalization and conceptualization services, public sector employees will be increasingly empowered to improve citizen interactions. 
  
• The exploration of business-as-a-service (BaaS) will result in the wider adoption of private clouds. Most public sector organizations will consider the adoption of private clouds over public clouds to realize the flexibility and scalability benefits of cloud computing without compromising on security, availability and reliability threats. Although the technology risk is lower when adopting private clouds as compared to public clouds, the cost is noticeably higher.

If  you have any questions about the report, please feel free to contact me at geraldwang@idc.com.

 Figure 1: Key Themes for the APEJ Public Sector ICT landscape

Malware Continues to Plague Government Security

Tags: government, it priorities, security

In ZDNet's September article "Cheap Hardware Infects Government Agencies", the Australian shadow defence minister David Johnston was reported to make a stand on introducing new cybersecurity powers into the Trusted Information Sharing Network (TISN) for auditing government departments after ministerial advisors reported that various agencies have bought cheap IT hardware loaded with malware.

In Australia, the use of the Internet for public sector interactions grew from 19% between 2004 and 2005 to 38% in 2008, according to results from the “Use and satisfaction with eGovernment services” survey. The Australian government needs little convincing about the importance of cyber security when the interactions with the public through the Internet are higher than that through personal contact.

It is no surprise that IT security continues to remains a key priority for public sectors in the Asia/Pacific.  In one of our IDC Government Insights report (Best Practices: Building Resilience, Security, and Privacy in Evolving Public Sector Environments), we found that out of the 13 countries covered in the IDC Asia/Pacific Continuum Survey in 2009, 12 had placed security-related initiatives within their top five IT-related priorities for 2010.  Public sector executives from countries such as Australia, Indonesia and Philippines have cited security as the second most important IT investment priority moving forward.

As a custodian of a huge amount of personal data as well as sensitive information on national security, data protection remains a paramount concern for governments around the world. Any compromise of personally identifiable information and sensitive, mission-critical data could have an impact on public safety, national security or operational readiness, and undermine public trust.  At the same time, whilst governments seek to leverage more and more on the Internet as a means of communication and to transact more efficiently with their citizens, the threat of cyber attacks on their networks, web sites and digital assets continues to grow.

However, a worrying trend is noted where security considerations are made only as an afterthought.  A group of government respondents in our survey assessed or considered security solutions only after a data leak occurred within their organization, or upon hearing of such cases in other organizations. With the global economic sub-prime crisis looming since September 2008, more critical national issues such as cost reduction, jobs creation and economic revival have taken center-stage priorities for the AP Public Sectors.

David Johnston intends to push a ban on government agencies blindly placing cost considerations over security assurance goods after government departments discovered backdoor malware in poorly controlled procurement of computer equipment.  The Department of Defence was reported to have repelled 2400 cyber attacks in 2009 alone, indicating that exercising some caution goes a long way in the cybersecurity space.

Governments are considering cloud technologies in a bid to drive more efficient operations

Tags: accountability, asia/pacific, cloud computing, government, healthcare reforms, public policy, virtualization

The recent global recession has increased public scrutiny and accountability demands on the IT budgets of government organizations. Paradoxically, these organizations are increasingly under pressure to raise service competency and productivity. This cost and performance management irony has propelled public agencies to look to other technological alternatives, such as cloud computing solutions.

In the latest IDC Government Insights study, “Looking Ahead: Articulating Cloud Competencies for the Aisa/Pacific Public Sector (Doc #AP9694203S)", IDC Government Insights discussed the trends driving the adoption of cloud technologies, whether public, private or a hybrid of both models, and the concerns over the use of cloud computing technologies in the public sector such as security, reliability and regulatory compliance.

In general, most public sector agencies are widely dispersed operational silos and have an urgent need to coordinate and integrate the various egovernment functions. Notably, the challenge today is that these agencies face varying policy and operational restrictions which translate to different needs and scales on their IT capacity. As the business case for the traditional data center is no longer sustainable in the long run, the adoption of cloud computing technologies in the public sector has become a viable option.

We note that the Asia/Pacific public sector is still apprehensive about the adoption of cloud computing especially in agencies that handle sensitive information. Most of the initiatives today are still at an experimental stage as the public sector tries to determine the return on investment (ROI) and weigh the risks involved in the adoption of cloud computing technologies.

Governments should take an active change management stance to address the people and process aspects of cloud implementations, such as revolutionizing traditional workflows and facilitating interoperable standards to bring about greater inter-agency coordination. All the stakeholders involved need to internalize the value and application of the cloud model so as to truly realize a continued and successful egovernment transformation.

We are also expecting data protection and security solutions such as "rights-management-as-a-service", and integrated business intelligence and analytics applications to feature strongly as key technological innovations that lead the adoption of cloud computing for the public sector.

Inevitably, apart from cost management agendas, public sector agencies will need to define their own set of business requirements for cloud computing solutions. This means they have to explore and gather distinctive proficiency and awareness towards building a specialized enterprise-grade cloud services model that fits the unique environment it serves. Thus, the eventual adoption of cloud technologies, whether public, private or a hybrid of both models, lies fundamentally on the operational requirements it seeks to address.

Demonstrating public sector agility - Singapore's IDA surges ahead with egovernment revitalization plans

Tags: government, it priorities, public policy, social media, web 2.0

IDC Government Insights'  latest report "Opportunities Abound: Analysis of Singapore's US$720 Million Public Sector FY10 ICT Procurement Plans (Doc #AP9694104S, June 2010) " reveals that the Singapore government's future ICT procurement plans will revolve around new technology areas such as business intelligence (BI), ubiquitous presence and social media.  

This finding was echoed in a recent interview which Straits Times did with James Kang  (Chief Information Officer at the Infocomm Development Authority of Singapore). In the interview, James shared that the Singapore government is starting to transform its online citizenry services to leverage on the rapidly evolving ICT environment that the nation is building upon.

There is also a strong indication that the government is planning to boost collaborations; and, it is not just within the government organization, but also with various stakeholders such as the ICT industry and the citizenry it serves. Increased collaborative engagements through social networking platforms such as Facebook, Twitter, and YouTube are likely to be pursued.

As the government pushes ahead with the upcoming iGovt2015 public sector masterplan, IDC Government Insights expects to see strategic directives in revitalizing public services, systems consolidation and sustainability business solutions.

To date, Singapore has received several international accolades for its e-government excellence. This success however, is not an overnight miracle. Singapore's computerization journey first began almost 30 years ago with the Civil Service Computerization Program that was primarily targeted at automating work functions and reducing paperwork for greater internal operational efficiencies.  

Ultimately, egovernment efforts are not all about the implementation of technology alone, but also, the changing approach to the way the government delivers its traditional services. James also said in the interview that the key to successful egovernment implementation lies in changing mindsets and taking calculated risks within the government. I can't agree more with this statement. In addition to "changing mindsets and taking calculated risks," strong leadership directives and commitment from all stakeholders involved remains crucial ingredients of successful egovernment transformation.

The China v. Google standoff: An end to the Chinese consumer myth?

Tags: , china, government, search engine

Governments should stretch the stimulus dollar

Tags: accountability, economic stimulus, government, transparency

Since the onset of the economic crisis in September last year, governments have gone into crisis mode, bailing out critical institutions and announcing mega stimulus packages in hopes of cushioning the financial impact on their economies.

This avalanche of uncertainty has left a lingering 'bitter-taste' when over a trillion dollars worth of taxpayer dollars are spent on rescuing money-losing businesses. The question for citizens remains, "is my government spending our money rightly and wisely?" as they scrutinize stimulus and budget initiatives unveiled and look for government leadership in rebuilding the economy.

Correspondingly, the challenge for government CIOs is how to stretch the stimulus dollar through IT investments – how to deploy IT capabilities and implementations to reduce operational costs while enhancing efficiency, and how to increase transparency and accountability as public confidence in institutions from banks to government itself dips.

Technology and innovation create immense transformation power to improve the business of government and the lives of citizens. CIOs should optimize the potential of technologies such as Web 2.0 – from blogs, and wikis to other social networking applications – to enhance collaboration and citizen participation, and create workflows and nurture skills for applications that have not been tried before. Likewise, as citizens expect government to behave more transparently and efficiently, CIOs can ride on stimulus initiatives to strengthen a focus on risk management, compliance, dashboards, and other metrics to manage performance and demonstrate accountability. 

However it is important to urge caution not to go overboard with such initiatives to the extent that they are seen to saddle government employees with a greater bureaucratic burden that translates into more red tape that citizens' face, instead of focusing on the original objectives of helping citizens in these new and challenging economic times!