China Tells

(WSJ) Last year was a relatively good year to be a Chinese bank, and for none more so than for China Merchants Bank Co., a mid-sized lender that in recent years has built a strong franchise and reputation for quality service.

While the global financial crisis savaged other big banks around the world, it did relatively little harm to Chinese lenders, who continued to lend at a rapid clip even as Western financial institutions tightened credit. While earnings growth slowed, it was still quick enough to be the envy of almost every other major financial sector in the world.

China Merchants Bank’s net profit in 2008 rose 38% in 2008 to 21.08 billion yuan ($3.09 billion) — a faster rise than larger rivals like Industrial & Commercial Bank of China Ltd. and Bank of China Ltd. So it is perhaps not surprising that Wall Street Journal Asia subscribers and other businesspeople ranked China Merchants Bank first overall for leadership in the Asia 200 survey of Chinese companies, beating out other financial companies and a bevy of big technology companies.

Of the top five spots in the Chinese survey results, four went to tech giants: personal computer maker Lenovo Group Ltd., wireless carrier China Mobile Ltd., online travel service Ctrip.com International Ltd., and Internet search operator Baidu Inc. That reflects China’s growing importance as a consumer market as well as the dominance of local players in the PC, mobile-phone and Web industries. It also underscores the value of having dominant positions in a market of China’s scale.

But the current economic and business environment has brought some challenges for these companies. China Mobile, the longstanding leader among China’s telecommunications carriers, has more wireless subscribers than any other company in the world with 493 million subscribers as of June. And overall, the number of mobile subscribers in the world’s most populous nation is continuing to grow, especially as they use phones to go online.

But China Mobile is facing increased competition after an industry restructuring last year that bolstered two big rivals: China Unicom (Hong Kong) Ltd. and China Telecom Corp. China mobile’s subscriber growth slowed in May and June, with just over five million net additions in both months compared with an average monthly increase of 7.3 million subscribers in 2008.

The economic crisis hasn’t been kind to tech firms, and most didn’t place in the top 10 in the Asia 200 financial-reputation category. Lenovo Group fared better than most, placing first for good company reputation and also making the top five for high-quality products and services, long-term management vision and innovativeness in responding to customer needs. But the company has undergone two major restructurings within the past year that included an 11% decrease of its workforce and a refocus on the China market after years of emphasizing growth overseas.

Lenovo, which was late to introduce consumer PCs at a time when commercial sales have declined around the world, suffered more than its competitors from waning global PC sales and was losing market share outside of China. But its dominance in China — the world’s second-largest PC market after the U.S. by shipments, where Lenovo maintains about 30% market share — remains the envy of foreign rivals Hewlett Packard Co. and Dell Inc.

Baidu, Google Inc.’s chief rival in China and the country’s most popular Web site, has rebounded after some negative publicity last year over its sales practices that sent the company’s shares plunging. After hitting a low of $100.50 on Dec. 10, the company’s Nasdaq-listed shares are now trading at more than three times that amount, at around $332. Baidu continues to experiment with new advertising models, in hopes of capitalizing on China’s 338 million Internet users, the most in the world. Baidu had a 62% share of the search market in China by revenue as of the second quarter of 2009, according to research firm Analysys International, while Google had just 29%.

Ctrip, too, has pulled far ahead of its chief foreign rival, eLong Inc., backed by IAC/InterActiveCorp’s Expedia Inc. As Chinese consumers travel more both in and outside of China, Ctrip benefits from its leading position in the online travel market. According to Analysys, industry revenue in China reached about $123 million in the second quarter of 2009, 13% higher than a year earlier even though bookings during that quarter were affected by news of spreading cases of the H1N1 virus.

For the banks, too, the current economic environment has brought challenges and opportunities. A massive stimulus package unveiled by the government late last year has triggered an explosion in bank lending that could boost financial performance in the short term but that some analysts worry could erode lending quality over the long term.

In April, Ma Weihua, president of China Merchants Bank, said his company intends to boost its share of infrastructure loans as a response to the government’s call for banks to help finance stimulus-projects involving public-works construction. Mr. Ma said the government’s stimulus push could help his bank increase its medium- and long-term lending and improve its asset quality. Expanding aggressively into corporate lending will likely pit it against heftier rivals like ICBC, which ranked No. 7 overall in this year’s survey.

But China Merchants Bank’s main strength is in the retail business. It has about a third of the domestic credit-card market, making it the main player among rivals who have been struggling to grab double-digit market share. The bank also was an early entrant into high-end wealth management. In June, it announced plans to add at least five more private banking centers to its eight existing branches in the country, giving it one of the most extensive wealth-management networks among China’s lenders. China Merchants Bank, in a report jointly prepared with Bain Consulting, says there were 300,000 such customers in China last year.

The Asia 200 survey identified China Merchants Bank as the leader in providing high-quality services and products and innovativeness in responding to customer needs. The lender placed second on another three assessment criteria: financial reputation, good company reputation and long-term management vision.

In June last year, China Merchants Bank became the controlling shareholder of Wing Lung Bank Ltd. in Hong Kong in an acquisition that hurt the bank’s earnings as the market value of the Hong Kong lender plunged amid the economic crisis. CMB booked a 579 million yuan impairment charge for its stake in Wing Lung last year. The acquisition also reduced its capital base. At the end of March, CMB’s capital-adequacy ratio was 10.95%, down from 11.34% at the end of last year.