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Backgrounders> Business
UPDATED: December 19, 2006 NO.50 DEC.14, 2006
Banks Bust Open
Banks and other financial sectors open their doors to foreign competition
By LAN XINZHEN
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Officially, December 11 marked a turning point for the Chinese financial sector. Under China's commitments to the World Trade Organization (WTO), beginning December 11, foreign banks must be fully allowed to participate in the Chinese market. Practically speaking, that means they can enter the renminbi retail business.

Banking, insurance and securities are the three pillar sectors of China's financial industry. The insurance sector was fully opened to foreign companies two years ago and the securities industry has also shown signs of international market life.

But banking was the sector that everyone's eyes were watching on December 11.

"The opening of the banking industry internationalizes the competition in the Chinese financial market," said Liu Fuxiang, professor with the University of International Business and Economics.

Ahead of schedule

Judging by the current situation, China has not only fulfilled its WTO commitments, but is going far beyond its commitments.

As a matter of fact, China completely opened its foreign currency business in 2001. In December 2003, foreign banks were able to conduct renminbi business for Chinese enterprises. Thirteen cities allowed foreign banks to operate renminbi businesses.

But all along, China had been pushing the envelope to open up the financial sector in other ways as well, Liu said. For instance, a single foreign company can take as much as 20 percent of the stock of a Chinese bank, an increase from the committed 15 percent. As of December 2005, renminbi business in 25 cities was opened to foreign banks, with seven cities ahead of schedule. Meanwhile, 25 foreign banks have acquired stock in 20 Chinese banks.

In the insurance sector, the foreign stock holding should not be above 50 percent in life insurance companies. Apart from that, the insurance sector has been opened to the outside world on a general basis.

In the Chinese securities sector, perhaps the biggest indicator of market progress is QFII (Qualified Foreign Institutional Investor), which provides foreign capital an opportunity to participate directly in the Chinese domestic stock market. By October 27, 51 foreign institutional investors became QFIIs, with investment quota of $12.6 billion.

Zhou Zhengqing, Vice Director of the Finance and Economic Committee of the National People's Congress, once a participant in WTO negotiations, noted that China has vigorously opened its service trade and has fully fulfilled its WTO commitments in many important service sectors, including finance.

More competition

Liu stated that there are two highlights of the foreseeable competition among financial institutions.

The first is that the financing ability of small and medium-sized enterprises (SMEs) will be improved.

Liu noted that there is currently over 9 trillion yuan of superfluous liquidity in the Chinese banking system. If the more than $1 trillion in foreign exchange reserves are added to the mix, the total idle capital accounts for about 46 percent of the total financial assets.

"The waste of financial resources is huge," noted Liu.

Ironically, many SMEs cannot get sufficient support from banks. The reason for this often cited by banks is that they fear that they cannot get their loans back if SMEs fail. But as Liu contended, the true reason is that the operational mechanism of domestic banks is immature. Several years ago, they were all state owned.

"As for SMEs, foreign banks' involvement in renminbi business provides them another way to raise money," said Liu.

The other highlight is that Chinese people will have more investment opportunities. Many financial services, including housing mortgage loans, medical insurance, car loans and educational loans, are not well developed. People tend to determine how much to spend in the future based on their current income.

Now, faced with foreign investment ideology, more and more Chinese will turn into investors rather than mere depositors.

Su Ning, Vice Governor of the People's Bank of China, believes the opening of the financial market will push financial institutions to create new services for consumers.

After China's accession to the WTO in 2001, China's financial industry was forced to innovate to provide new financial products like credit cards and housing loans.

"The opening up of the financial industry brings us advanced financial technology, financial service and financial product designs," Su said.

"In addition to the opportunities and benefits, foreign financial institutions have also brought about a negative impact, which cannot be neglected," said Xu Hongcai, professor with the Capital University of Economics and Business.

Xu contended foreign financial institutions could drain the talent of domestic institutions.

According to Xinhua News Agency, Peter Wong, Executive Director of HSBC, said HSBC planned to add 2,000 more employees on the Chinese mainland. By the end of 2007, the number of HSBC employees on the Chinese mainland will surpass 4,000. Meanwhile, Standard Chartered, Heng Seng Bank and Bank of East Asia are also rapidly expanding and recruiting more people.

"Foreign financial institutions must localize, and so must their employees. As a result, more talented financial personnel will be lost to foreign institutions," said Xu. "The real challenge will be in the few years ahead."

Wang Zhao, a researcher with the Development Research Center of the State Council, noted that the entry of foreign financial institutions imposes difficulties on managing financial institutions. "First of all, it will be hard to coordinate monetary policy," said Wang.

Further, he said, in 1997 China successfully overcame the Asian financial crisis because its financial market was not fully opened to the world. Under the current situation, any tiny fluctuation in the world financial market will affect the Chinese market.

Future development

From now on, the Chinese financial system will undergo significant change, said Xu Mingqi, an economic researcher with the Shanghai Academy of Social Sciences.

Xu believes that the competition among financial institutions will change the operational model of Chinese banks.

Xu noted that in the short term, despite the fact that the market share of foreign financial institutions is incomparable to that of Chinese financial institutions, fierce competition would still arise.

"One element should not be neglected: Foreign financial institutions' advantage in terms of mixed operation will win them a competitive edge in the Chinese financial service competition," said Xu.

His view is echoed by Huang Yanfen, a business professor with the Guanghua School of Management of Peking University. Huang pointed out that mixed operation is the focus of competition in the future Chinese financial sector.

Huang noted that for a long period of time, the Chinese financial industry has been operated separately, which means that banking, securities and insurance operate on their own. Although this separated pattern is helpful to control financial risks, mixed operation should be adopted by the Chinese financial industry, which will ease its disadvantages in an open market competition. Therefore, breaking down the current separated operation pattern is the key to China's financial restructuring.

"Mixed operation is a trend for the financial industry," said Huang.

Huang believes that competition makes the domestic financial market more globalized.

The lifting of restrictions in the Chinese financial market is helpful for foreign companies' entry into China's market, and at the same time cultivates domestic financial institutions to become stronger in an environment full of international competition.

"The opening up of China's financial market also stimulates the integration of Chinese laws and regulations into common international practice," Huang said.



 
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