The Bank of Montreal was founded nearly two centuries ago, as Canada’s first bank. Since then it has marked a considerable number of other ‘firsts’: the financing of Canada’s first transcontinental railroad, service as the Confederation’s first central bank (until 1935), the first Canadian bank to open branches abroad. And, in 1817, the first foreign exchange transaction, which conducted in support of trade with China.

Now branded as BMO Financial Group, today it ranks as one of Canada’s largest financial institutions with assets as of Q1, 2004 of $265 billion. BMO includes –Chicago-based Harris Nesbitt, its investment and corporate banking operation focused on serving the U.S. mid-market.

The Harris Nesbitt franchise, which includes practices in Houston in the energy fieldand New York in media and communications to name a few, is focused on some 1,500 mid-west clients, fundamentally manufacturers, all mid-market with sales ranging between $50 million to $1 billion (the exception to the mid-market profile are clients from the agricultural and food sector). A large portion of them are privately rather than publicly held.

Supporting the U.S. operations of its clients is the main strategic focus of Harris Nesbitt-but, as BMO President and COO Yvan Bourdeau points out, “we all know the attraction of China as a manufacturing platform.” Correspondingly, a conspicuous competitive advantage Harris Nesbitt affords its clients is the ability to take them into China either as direct investors in establishing a plant, joint venture partners with local parties, or as purchasers of contract manufactured goods to be brought back to North America. “These are alternatives more and more being explored by our clients,” observes Bourdeau.

“Domestic business presents the greatest opportunities for the bank,” continues Bourdeau, “but questions about our capability internationally, and particularly in China, are much more frequent today than they were in the past.”

In its current iteration, BMO began establishing relationships with the Bank of China some five decades ago, opening up a representative office in Guangzhou in 1955 (it would eventually become a full-service operation in 1997). “We started going there to support our clients doing business in China,” notes Peter Wren, Managing Director, Trade Finance. Among those early clients were telecommunications manufacturer Nortel, Bombardier (the maker of ski-doos whose product line has since expanded into commuter aircraft and subway carriages), and the Canadian Wheat Board (BMO provided financing services for Canada’s first major grain sale to China in 1961).

In the absence of U.S. banks able to transact business in China, BMO Financial acted as a financial intermediary in China’s trade with the United States, as well as a clearing bank for trade and other transactions denominated in dollars. Its most significant transaction in this role involved the sale of aircraft by Boeing to China.

The beneficiary now of extensive experience in the country and long standing relationships with financial officials, BMO is positioned in the forefront amongst institutions participating in the opening up of banking in China. Roger Heng, Managing Director China, has been in the country for over twenty years, arriving “when China had just opened up.” Back then the clients were the major engineering and consulting firms---Bechtel, Flour Daniels---building China’s original chemical and industrial complexes.

By Heng’s count, China is beginning to enter the third phase in its banking development. Phase 1 was quite basic and very much government driven. There were only 13 state owned trading houses in the country with the authority to deal with foreign commerce and all transactions had to be with the Bank of China (not to be confused with the central bank). Phase 2 was in the 1990s, as manufacturers started to establish a presence in the country with limited, strategic investments (the local currency was still not convertible, which acted as a serious disincentive to more aggressive action).

Beginning some five years ago Phase 3 began. A reasonable logistics infrastructure was now in place, the population was becoming more conversant with modern commerce. WTO rules and requirements were being instituted. The politicians, increasingly confident about being able to manage the rural sector (some 800 million farmers), are aggressively encouraging industrialization. The people are demanding higher standards of living.

While the banking system continues to be carefully controlled, liberalization is in play. The government is investing upwards of $45 billion into the two biggest banks, Bank of China and China Construction Bank, as a prelude to what in the west would be called ‘privatization’. Modernization of credit philosophy and management is accompanying this injection of capital. Heng predicts the government will seek strategic investments in the near future from foreigners and eventually the banks will be listed on the China stock market.

The Chinese are great savers (saving on average 30% of their income). It is expected that within ten years there will be $75 billion to $150 billion in savings assets available for management, much of which will not be accessible to foreign banks. Until recently there have been no available investment channel other than banks but that is changing. Real estate is now privatized (a house and a car being the two top consumer demands). There is an equity market (although some liken it more to a casino).

BMO, by virtue of having been on the ground for so long, is particularly well positioned to reap benefits from these changes. The bank now has three locations in China in addition to its branch in Hong Kong (Guangzhou, Beijing and Shanghai) as well as correspondent relations throughout the country. “All the changes present opportunities for us,” says Heng. As an example, he cites the foreign exchange license recently received that allows the bank to deal with anybody in China including local citizens and all counterparties with whom they wish. In several years, as per WTO requirements, BMO will be able to take deposits and make loans directly in renminbi to support its North American clients in the local currency (something currently prohibited).

Illustrating the kind of services Harris Nesbitt offers, Bourdeau offers the example of a consumer electronics client who came to China a half-dozen years ago to build a factory intended to ship product back to America (the savings amounted to 50% over U.S. production). The bank helped the company deal with all kinds of aspects associated with establishing a plant in an industrial park and arranged for commercial financing and the importation of machinery. The factory got up and running but local demand for the product proved so great that they never exported output but sold it in China. Today they have a total of three plants there.

It’s not products that distinguish BMO competitive advantage in China, says Heng. Letters of credit are letters of credit. But what isn’t a fungible commodity is experience. “Nothing is more important in banking than judgment calls. Our role is to exercise judgment that has been acquired over a long time to support and facilitate the operations of our North American clients. We can help get Chinese banks to support them. In remote areas we can mobilize contacts. In China things are moving fast, everyday the regulations are changing. In order to receive quality service from a bank, it is important that they have good judgment.”