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.