WTO entry
A crucial milestone in the financial liberalization process was China’s accession to the World Trade Organization (WTO) in 2001. China’s entry into the WTO has attracted worldwide attention. China promised to work hard to strictly fulfil the commitments it made for accession into the WTO. The commitments generally state that China will eliminate all kinds of restrictions on foreign banks, which will be allowed to conduct all the banking businesses in China, for both domestic currency (RMB) and foreign currencies, with customers for both corporate and residents, and in any place of the country.
However, the approach for openness has been very gradual and cautious. The WTO agreed China could take a gradual pace of openness and allowed a five-year transition period (2002-2006) for preparation of full openness after the entry. The transition period is the major benefit given to developing country. Once the transition period ends, for the first time China has to fully open its financial market to foreign competitors after 2006. According to the negotiation with the WTO, China set five-year time schedule for gradual opening-up. The Table 2.8 lists the banking market opening-up schedule after China’ accession to the WTO.
2.4.1
Time schedule for opening-up after WTO entry
Before the WTO entry, foreign banks in China were only allowed to carry out foreign-currency transactions and with several restrictions. Following the formal entry into the WTO, China immediately cancelled all restrictions on regions and clients for foreign banks in handling foreign currency business in China. As a consequence, foreign banks can
51 open foreign exchanges business to both Chinese enterprises and citizens. However, for domestic currency business, foreign banks were authorized to offer local currency services with geographical restrictions. China gradually abolished regional restrictions on foreign banks within the five-year transition period. In particular, China opened domestic currency banking business in Shenzhen, Shanghai, Dalian and Tianjin at the time of its entry into the WTO. One year following the entry, banking business in Guangzhou, Qingdao, Nanjing and Wuhan were opened. Within two years after the accession, it opened Jinan, Fuzhou, Chengdu and Chongqing. In three years, the market opening-up were expanded to another four cities, namely Kunming, Zhuhai, Beijing and Xiamen. In four years, banking markets in Shantou, Ningbo, Shenyang and Xi'an were further opened. Five years after the accession, all geographical restrictions imposed on domestic currency business for foreign banks were fully eliminated (see Figure 2.10).
Table 2.8: Time schedule for opening-up after the WTO entry
Time Regions Clients
Foreign currency business
Entry (2001) All the regions Both enterprise and
residents
Domestic currency business
Entry (2001) Shenzhen, Shanghai, Dalian, Tianjin
In one year (2002) Guangzhou, Qingdao, Nanjing, Wuhan
In two years (2003) Jinan, Fuzhou, Chengdu, Chongqing Enterprise only
In three years(2004) Kunming, Zhuhai, Beijing, Xiamen Enterprise only
In four years (2005) Shantou, Ningbo, Shenyang, Xian Enterprise only
In five years (2006) All the regions
Both enterprise and residents
52
Figure 2.10: Map of areas opened up for domestic currency business
Source: drawn by author based on Table 2.8
Moreover, China called off restrictions on target clients for domestic currency business step by step. In two years after it joined the WTO, China permitted foreign banks to handle RMB business for Chinese enterprises and after five years of entry permitted foreign banks to provide such services to all Chinese clients, namely both enterprise and residents.
The entry of foreign banks into the long protected Chinese local market has been a gradual process, but accelerated by the commitment of China's entry into the WTO in 2001. This is an important milestone in the opening of China's financial markets.
53
2.4.2
Challenges faced by Chinese banks after the opening-up
After China's entry into the WTO, the competition as well as cooperation between domestic banks and foreign banks has been intensified in the Chinese banking market. As a consequence, both opportunities and challenges exist for the Chinese banks after the entry into the WTO. The opening of banking market is favourable to improve the structure of banking capital, enhance the inflow of international funds and absorb advanced management and operation skills from modern and large banks, which will improve the overall banking services and eliminate the disparity between China and the international standards. Unfavourable factors such as strong competition may cause financial crisis which endanger the stability of the financial system and economic security. Particularly, hot money must be carefully monitored to prevent it rushing in to threaten the national economy. Therefore, the government must bear a sense of urgency, crisis and responsibility to examine the actual situation and weaknesses in current banking system so that they can set a goal and explore new approaches to ensure a steady healthy development of banking market under the process of reform and opening up.
We can foresee that competition in the future will be very intense, foreign banks will participate in various services such as foreign and local currency retail business, mortgage, corporate lending and credit cards. However, in short run, foreign banks do not serve as a big threat to the Chinese domestic banks. Although foreign banks grow very fast, the market share they have captured is still very tiny. This is possibly because domestic banks have some dominated advantages. Firstly, to some extent, there is implicit hidden protection from the Chinese government, especially for big commercial banks. Secondly, domestic banks have well-built reputation and brand image. Thirdly, domestic banks have long business relationship with domestic enterprises. Last but not least, they have already established large number of networking branches spread all over the country. However, foreign banks can
54 compete with domestic banks for the creative service, middle business, expertise and management team. In short, the Chinese domestic banks have comparative advantage over traditional deposit and loan business, but foreign banks have advantages over the off-balance sheet business which is more likely to improve their profitability in the future.