How does this company make money?
The bank earns most of its income from the gap between the interest rate it charges on renminbi loans and the lower rate it pays on deposits. It also collects commissions when corporate clients trade foreign exchange, charges fees to wealthy individuals who use its wealth management products, and earns investment banking fees when it underwrites bond issuances for Chinese companies.
What makes this company hard to replace?
Corporate clients face a specific regulatory barrier: Chinese rules require businesses in certain industries to hold their primary banking relationship with an institution that is approved for their sector. On top of that, state-owned enterprise clients are deeply integrated with government payment systems that run through the bank, making a switch technically complicated and operationally disruptive rather than just inconvenient.
What limits this company?
The People's Bank of China sets a hard cap on how much the bank can lend each year and specifies which sectors get the money. Even if the bank has plenty of deposits and its own financial cushion is healthy, it cannot move that money into higher-returning loans elsewhere. The ceiling is assigned from above, not something the bank can negotiate its way around.
What does this company depend on?
The bank cannot operate without five named inputs: the People's Bank of China, which sets lending quotas and monetary policy; the China Banking and Insurance Regulatory Commission, which holds the operating licenses; the China Foreign Exchange Trade System, through which foreign exchange transactions run; the China Government Securities Depository Trust & Clearing, which handles settlement; and the State Administration of Foreign Exchange, which must approve any cross-border transactions.
Who depends on this company?
Chinese infrastructure developers — including those building Belt and Road Initiative projects — rely on the bank for project financing and would lose that funding if the bank stopped lending. State-owned enterprises depend on its subsidized lending rates to fund day-to-day operations. Chinese exporters use the bank for trade finance and foreign exchange hedging, and those services would be disrupted if the bank could no longer provide them.
How does this company scale?
Opening new branches and rolling out digital banking services across China's tier-two and tier-three cities is relatively straightforward and cheap to repeat. What does not scale the same way is the relationship work behind large state-owned enterprise loans — those deals require deep knowledge of government industrial policy and which projects have official backing, and that kind of judgment cannot be automated or handed off to a standard process.
What external forces can significantly affect this company?
US-China trade tensions can disrupt cross-border payment flows and cause foreign exchange rates to swing, which affects the bank's trading business and its corporate clients. China's population is ageing, which over time means fewer working-age households putting money into savings accounts — and household savings are the raw material of the deposit base. The Chinese government also requires the bank to direct specific amounts of lending toward renewable energy and carbon reduction projects under its green finance mandates, which shapes where the money must go regardless of which loans the bank would otherwise prefer.
Where is this company structurally vulnerable?
If the Chinese government shifts its development priorities away from a project, or if one of China Everbright Group's infrastructure investments starts losing money, the bank is hit twice at once: its loan to that project goes bad at exactly the same moment the parent's equity stake in the same project loses value. Because both exposures were written against the same underlying asset, the losses move together and hit both balance sheets simultaneously.
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