Meanwhile, the Chinese Government attaches great importance to mitigating the risks arising in the process of opening up through prudential supervision. By drawing upon international supervisory standards and best practices, China has endeavored to create a fair and transparent supervisory environment, and has made notable progress in integrating the supervisory standards and requirements for both local and foreign banks, said the CBRC in a statement. China also keeps improving its processes and procedures for the supervision of foreign-funded banks, including adopting a risk assessment system for the supervision of foreign bank branches.

New regulations

On November 16, the State Council issued the Regulations on Administration of Foreign-Funded Banks, which took effect as of December 11, the day when China was expected to fully open its banking sector to foreign competition.

According to the regulations, subsidiaries of foreign-funded banks are encouraged to become locally incorporated banks so that they can enjoy the national treatment and the CBRC can better supervise their operation. "The policy favoring Chinese corporate status complies with WTO rules, which allow its members to adopt measures of prudence when opening up the banking sector," said Wang Zhaoxing, Assistant Chairman of the CBRC.

After they become locally incorporated banks, foreign-funded banks can issue credit cards in renminbi. The foreign-funded banks are required to have good risk management, risk control systems and information technology support systems to hedge risks in the issuance of credit cards in China.

The new regulations lift restrictions on renminbi and foreign-currency transactions by solely foreign-funded banks and Chinese-foreign joint venture banks. Chinese branches of foreign banks, however, are banned from offering renminbi services to Chinese citizens unless an individual, having obtained the approval of the banking regulatory authority, makes a fixed deposit of no less than 1 million yuan.

Foreign financial institutions with good credit are encouraged to join China's commercial banks through share purchasing and equity participation. The introduction of foreign strategic partners into Chinese banks has played a positive role in improving their risk management, financial innovation and in enhancing their competitiveness, Wang added.

Foreign-funded banks welcome the new regulations. Richard Yorke, President of HSBC's China operations, said the release of the regulations marked a historical milestone for China's finance industry and also marked the fifth anniversary of China's entry into the WTO. HSBC Group has 13 branches and 13 offices on the Chinese mainland and a new Xi'an branch will be launched before the end of this year.

Makoto Motooka, the Shanghai branch director of the Bank of Tokyo-Mitsubishi UFJ, expressed his respect for the Chinese authorities in pushing forward the opening-up of its financial sector by saying that his bank plans to promote business in China and the new regulations would provide strong support. "We hope to have the opportunity of discussing our future development with the Chinese financial authorities," said Motooka.

Banks can hardly wait

The Citigroup consortium signed an agreement to pay 24 billion yuan for 85.59 percent of Guangdong Development Bank (GDB) shares on November 16, the same day of the release of the new regulations.

Among the six-institution consortium, Citigroup, China Life Insurance Group, the nation's largest insurer, and State Grid, a major electricity distributor, will hold 20 percent of GDB shares respectively. The other three institutions, including IBM Credit, will hold the remaining 25.59 percent.

GDB Board Chairman Li Ruohong said the restructuring will help the bank's development with participation of both international and domestic players. GDB President Zhang Guanghua deemed that the restructuring was not the only one of its kind in the reform and opening up of China's finance industry. Before this deal, HSBC owned 20 percent of Bank of Communications Ltd., China's fifth largest bank, while Bank of America has 8.52 percent of China Construction Bank, the third largest commercial bank in the country.

As China fulfills its commitments to the WTO, competition in the banking sector will sharpen. Foreign banks that previously targeted high-end customers will turn their attention to small and medium-sized enterprises, said Zhu Min, Vice Chairman of Bank of China.

The government has taken measures to open financial markets, including the introduction of foreign strategic investors, which allowed the Industrial and Commercial Bank of China to invite help from Goldman Sachs, Allianz and American Express, said Dong Tiefeng, an official with the CBRC. The reform's ultimate goal was to transform the banks into market players with efficient and modern corporate governance, Dong continued.

"Chinese banks should improve their capital structure and provide more diverse products," said Cao Yuanzheng, Chief Economist with Bank of China International. According to Cao, they should also pay more attention to business risks, especially in fields such as electronics and information resources sharing.