BEIJING -
China's local banks are in for a shock when the
sector is further opened up to foreign banks at
the end of this year and will need to become much
more competitive, according to Shi Jiliang,
vice-chairman of the China Banking Regulatory
Commission (CBRC). He said increased
liberalization will have a major impact on local
banks, although the initial shocks are not likely
to be too significant.
According to its
World Trade Organization (WTO) commitments, China
is scheduled to scrap restrictions on foreign
banks in December. At that time, foreign banks
will be allowed to provide a
retail yuan business to local
residents and set up branches in any Chinese city.
"This will have a big impact on Chinese banks,"
Shi said.
The biggest impact will be on
renminbi savings, he said, as foreign banks are
likely to siphon off some of the money which has
grown by an annual average of 2 trillion yuan
(US$248.5 billion) in recent years to 15 trillion
yuan by the end of 2005 from local banks. "It's
likely that a fair number of the smaller banks
might see their clients, good clients, leave [for
foreign banks]," Shi said.
But, he added,
as foreign banks only focus on high-end clients,
"there will not be an exodus of savings deposits
in the initial phase after liberalization."
Chinese banks will need to improve their
competitiveness by accelerating reform and improve
their services to be able to withstand the impact,
he said.
Some restrictions will remain in
place; Shi said foreign banks will not be allowed
to invest in more than two Chinese banks, a rule
he said is necessary to prevent monopolies and
unfair competition. Real strategic investors "do
not need too many partners," he said. "Foreign
banks need to understand this," he added. "This is
not to restrict them, but to protect fair
competition, which is good for the industry."
The regulator thought the opening up of
the banking sector to foreign banks has been
orderly so far, and Chinese regulators are
carrying out effective supervision. Shi said:
"Currently, the opening up of the market has been
orderly, and entry requirements have been strict.
The principle of banking liberalization is
correct, and fits with the needs of China's
economic development."
The vast Chinese
banking market is very attractive to foreign
banks; major banks in many developed countries
have started doing business in China, the official
said. "And their performance is getting better and
better."
A total of 71 foreign banks have
set up 238 operational entities in 23 Chinese
cities by last October, according to the CBRC.
Although they still account for just 2% of total
banking assets, they have grabbed a 20% share of
foreign-currency loans. Since the local currency
business with local businesses was opened to them
around two years ago, foreign banks' yuan assets
have risen to 100 billion yuan.
The
official said the current ceilings on foreign
investment in local banks are appropriate and will
probably not be changed before the end of the
year. Foreign banks are allowed to own no more
than a combined 25% of any Chinese bank. The
ceiling on a single foreign investor stands at
20%.
"Looking at our management capacity
and how we are coping with the opening up, I
believe they are appropriate," said Shi. But
adjustments to the ceilings are likely after full
liberalization "if economic development enters a
new phase that requires foreign banks to do more
business," he added.
