Besides facilitating locally incorporated foreign banks, the Chinese Government also hopes to create a better environment for foreign bank branches. For example, foreign bank branches may continue their current business and are allowed to take in an renminbi time deposit of no less than 1 million yuan from Chinese citizens. The business approval process will be further streamlined and the working capital requirement is lowered. Also, the requirement that the foreign exchange deposits taken by a foreign-funded bank shall not exceed 70 percent of its aggregate foreign exchange assets within the Chinese territory will be removed. Finally, foreign bank branches may, if they wish, convert into locally incorporated subsidiaries at any time according to their own business development strategies.

Deep impacts

As for the overall development of the Chinese banking sector, entry of foreign banks is obviously beneficial according to some analysts. “It can promote the healthy development of the Chinese banking industry,” said He Liping.

According to He, before China’s accession to the WTO, the non-performing asset ratios among all Chinese commercial banks were high. Just with the introduction of foreign banks, domestic banks have strengthened their efforts in disposing non-performing assets with the help of the government. Now, three of the four state-owned commercial banks have been listed in the stock market, and their competitiveness in the international market has been greatly improved. The Chinese banking industry is healthier than five years ago.

“We can anticipate that in the next few years, an increasing number of foreign banks will come into China and create larger influences on the Chinese economy,” He continued.

In his opinion, the entry of foreign banks can enhance competition in the Chinese banking market, influencing and changing the shareholding structure of state-owned banks and improving independence of domestic banks. More independent operation of Chinese banks will also trigger other changes, for example, in the arrangements of supervision mechanism and the operation of financial and monetary markets.

“This will help promote the enduring competitiveness and survival of domestic banks,” He added.

Wang Zhaoxing, Assistant Chairman of the CBRC, believes the entry of foreign banks can promote reforms in the Chinese banking industry and assist in maintaining China’s financial security.

Previously, foreign banks, not registered in China, could only do business in the country as branches whose supervision is carried out by their overseas headquarters and the regulatory authorities in their own countries. Once locally incorporated, they will be under the supervision of Chinese banking regulatory authorities.

The CBRC report also stated that the opening-up initiative will help China draw the foreign capital needed for its economic development, introduce advanced banking management expertise and technology, promote the banking sector’s reform, and improve the comprehensive competitiveness of the banking sector. As the achievements in China’s economic and financial development have been recognized internationally, more foreign banks are establishing themselves in the vast and fast-growing Chinese market and are seeking extensive and mutually beneficial business cooperation and partnerships with their local counterparts.

The Chinese banking market will also be enriched by the entry of foreign banks. The hope is that the quality of banking services will improve, including those in the under-banked regions in west, central and northeast China, ultimately promoting the country’s foreign trade and attraction to foreign capital. Likewise, foreign banks can leverage their international networks to support Chinese enterprises, facilitating their trade and investment abroad. Through direct investment in China, capital allocation to Chinese establishments and strategic investment in Chinese banks, foreign banks will access China’s foreign capital need for economic development, said the CBRC report.

The emergence of foreign banks also urges China to enhance international exchange and cooperation in the field of banking supervision. According to the CBRC report, by the end of 2006 China had signed bilateral memorandums of understanding (MOUs) with the regulatory authorities of 22 countries and regions worldwide, including the United States, Britain, Canada, Germany, South Korea, Singapore, Hong Kong, Macao, France, Australia and Italy. The MOUs cover information exchange, licensing, on-site inspection, confidentiality, supervisory consultation and a variety of other operations. As a representative of developing countries, China has actively participated in the negotiations and consultations on the Core Principles of Effective Banking Supervision and the New Basel Capital Accord. China has also actively worked on the domestic implementation of standards to upgrade the professionalism and international standing of China’s banking supervisory authorities.

Chinese banks respond

Guo Shuqing, Chairman of the China Construction Bank (CCB), has been paying close attention to two major issues: listing the CCB on the stock market and completing the CCB employee stock option program (ESOP). With the bank listed for over a year and a half now, and with the first ESOP list to be released by this year, the 50-year-old Guo can relax a little these days.

These two issues are musts for CCB. By listing with the stock market, it pushes the CCB into the international arena. Completing the employee stock option program secures its strength in human resources at a time when the entrance of foreign banks could strip its employees away.

This response is much different from many other domestic banks, especially some private banks, which are largely passive in the face of new challenges. In December 2006, Guangdong Development Bank sold 85.6 percent of its shares to the Citigroup-led consortium, being the first Chinese bank controlled by foreign capital.