Rabobank in China by maclaren1


									                             Banking Competition Kicks Off

The liberalization process of the banking sector in China is said to be completed by
December. The time for China to protect its fragile banking system is nearly over.

According to World Trade Organization regulations, the Chinese banking sector is committed to
allow foreign banks into their market competition. Since its accession to the WTO in 2001, China
has liberalized its banking system step-by-step. December 11 must mark the end of this process
with a complete open banking system, without any geographical and business-scope limitations.

Because of this liberalization process within the Chinese banking sector, it will be possible for
Chinese consumers to get a loan or an account with a foreign bank. Due to the new regulations,
China will fully open its renminbi business on December 11 to those foreign-funded banks
registered in China and incorporated locally. Banks that incorporate in China can, in theory at
least, do business in the local currency with the vast majority of the nation's billion-plus potential
market of retail customers.

Despite the opportunities, there are also restrictions to incorporate locally. First of all, foreign
banks must have been active for five years. They also have to register at a minimum of US $120
million. Secondly, foreign banks must be in business in China for three years, of which two years
straight must have been profitable. By contrast, banks that fail to incorporate locally cannot take
deposits of less than US$ 125 million, restricting them to China's growing but still relatively small
club of millionaires.

Foreign banks operating in China will have to incorporate within the country to offer bank cards
and mass-market banking services in yuan. Overseas lenders that don't incorporate locally must
set aside two times as much capital - US$ 25.4 million - as those that do, according to the China
Daily. They also can't issue bank cards and can take only large deposits, limiting their ability to
amass funds and grow through lending.

Foreign banks wishing to open a new outlet in China, must receive approval from the nation's
banking regulator, the China Banking Regulatory Commission, according to the new rules. The
overseas bank must then complete preparations to open the new outlet within six months of
receiving permission from the CBRC. Rules requiring foreign banks to incorporate locally are not
unusual in other Asian countries such as Australia, Malaysia, Indonesia and Singapore.

Song Dahan, deputy director of the Legislative Affairs Office of China's State Council, said the
regulations will protect the interests of depositors, and give the same treatment to both Chinese
and foreign-funded banks.

The Chinese government is also thinking about the reform on current income tax system that
differentiates Chinese and foreign-funded companies. Currently, foreign banks operating in
China enjoy preferential treatment compared to domestic banks in income tax rates, foreign
exchange deposits and loan rates, financing of foreign currency and inter-bank lending terms.

Wang Zhaoxing, assistant chairman of the CBRC, suggested as cited by Xinhua, that after foreign-
funded banks fully receive national treatment in China, they should share the same policy wi th
domestic banks in taxation. “Only in this way can the principle of fair competition be realized,”
Wang said. Granting national treatment for foreign companies means full access to the Chinese
market like their domestic rivals. But it also means paying as much tax as their domestic

Within the international banking sector the new Chinese regulations have triggered international
lenders to announce their plans to incorporate in China. A few foreign banks announced
immediately that they are ready to become among the first to incorporate in China. Foreign
lenders including HSBC, Standard Chartered, Bank of East Asia, and Hang Seng Bank have all
expressed their willingness to transfer operating branches into locally registered corporations.
Foreign banks are eager to offer loans, mortgages and credit-card services in the local currency to
spur expansion in the US$ 5.1 trillion industry.

The China Daily reported that Richard Yorke, China CEO of HSBC said: “It is a historic
milestone to mark the fifth anniversary of China's entry into the WTO and i ts commitment to
fully open the financial market.” Zhang Jianguo, president of China Construction Bank Corp is
positive on the stability of the Chinese banking sector: “Foreign banks don't pose a significant
threat to Chinese ones in the short run,” he said in an interview with the China Daily. “No matter
how many overseas banks pour in as the market opens, they'll continue to lag behind Chinese
banks in branch coverage and client base for the immediate future.”

However, figures suggest that the share of foreign banks is gaining edges. At present, Shanghai is
home to the largest number of foreign banks in China. By the end of June 30, 2006, there are 60
branches of foreign banks -including locally incorporated foreign banks-, 103 foreign banks and
representatives of non-bank foreign financial institutions. The total assets of foreign banks in
China were US$53.8 billion, a growth of 11.12 percent from the end of last year. They earned
US$ 446 million last year, a clear increase compared with US$ 196 million in 2001. Foreign banks
aim to tap the nation's US$ 2 trillion of household savings, partly through offering credit cards
and asset-management services.

Hong Kong's pro-Beijing newspaper Wen Wei Po recently revealed the strategic development
plans of five foreign banks in China, which stated by the end of this year HSBC has plans in
place to increase the number of its outlets in China to over 30 and further to 100 in the future;
Standard Chartered plans to increase its number of outlets to 44 in the next 18 months; and
Hang Seng Bank and Citibank also have their own development objectives. Besides building
networks independently, these banks have also bought equity stakes in China's domestic
banks with some of them even having stakes in more than one Chinese bank.

The question whether the opening-up of the Chinese banking sector will or will not pose
problems for Chinese banks, remains unanswered. The Chinese banking sector is said to be
vulnerable. Domestic banks have a stronger and larger network than foreign banks within the
Chinese market, but still many newspapers state that time is running out as China pledged to
open up the sector as part of its commitment to the World Trade Organization, according to
Asia Times. The online newspaper stated that “the state-owned Chinese banks need to reform
big-time”, the banks would be required to participate in global economic cooperation and
competition under the principles of free trade and once that happens, the state-owned banks will
lose out if they do not reform. The British newspaper The Guardian states that the opening-up of
the Chinese banking sector is expected to shake up China's inefficient banking sector.

David Hale, a specialist in the Chinese banking system says that China in the near future will
become more dependent on interest rates as a monetary instrument. This means that capital
flows rather than political decisions will be the key factor influencing the investments of
companies. In the Dutch Financial Daily he also states that the transformation of the Chinese
banking system is complicated and difficult because it has to go through a fundamental change.
In the same newspaper Zhao Xijun, an economics professor at Beijing-based Renmin University

of China says: “In some cities in China many currency transactions are already in the hands of
foreign banks. By 2007 these banks will try to conquer consumers within the domestic market.
The prospects for Chinese banks are not positive.”

The Shanghai Daily quoted Xiang Junbo, deputy governor of the Chinese central bank. He said
that international experience has shown that a “too fast” and “too much” opening up of the
banking sector will do harm, rather than benefit, to a country's economy.

The Chinese banking sector doesn‟t seem ready for foreign competition yet. But many
regulations moderate competition. According to Singapore's Chinese-language newspaper Lianhe
Zaobao, Peter Wong, Chairman of the Hong Kong Association of Banks, said it would take
approximately six months for foreign banks to apply for the incorporation of branches in China
and if there is any problem during this process, it might take another three months. So he
estimates that to open a branch in China, it takes at least nine months.

Since foreign banks are slowed down by the rules and regulations and the need to „go local‟, the
challenges for the Chinese banking sector will remain regulated and fierce competition will be


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