China is going very slowly and deliberately, but the direction is clear (indeed, it cannot be otherwise since it joined the WTO):
<http://english.people.com.cn/200512/06/eng20051206_225927.html> Foreign banks get to move in early China granted foreign banks more freedom to conduct the crucial local currency business Monday, moving ahead of its market-opening schedule as required by World Trade Organization (WTO) commitments.
Starting Monday, foreign banks like HSBC have been able to offer renminbi business to Chinese and foreign businesses and foreign individuals in seven more cities.
Shantou and Ningbo were opened up in accordance with the nation's WTO commitments, while Harbin, Changchun, Lanzhou, Yinchuan and Nanning, which were not on the schedule, were also opened, bringing the total number of cities to 25.
Meanwhile, the China Banking Regulatory Commission (CBRC) announced a reduction in the highest tier of operating-capital requirement for foreign bank branches' renminbi business to 400 million yuan (US$49 million) from 500 million yuan (US$61 million).
The operating-capital requirement for renminbi business for branches of foreign-owned and Sino-foreign banks was lowered to 200 million yuan (US$24 million) from 300 million yuan (US$37 million).
"These measures will certainly create an even better systemic environment for the development of foreign financial institutions in China," said Liu Mingkang, chairman of CBRC. "Profound changes are taking place in the opening-up and reform of China's banking sector."
Although the liberalization moves were bolder than many expected given the limited time left for local banks to prepare for full foreign competition, some analysts say they demonstrate the authorities' determination to catalyze progress in the local banking sector through competition.
In a report released by PricewaterhouseCoopers in September, the most important driver of change in the Chinese banking industry was the pace of regulatory change, foreign banks surveyed said.
China is expected to scrap all restrictions on foreign banks at the end of next year and allow them into such key areas as local currency retail business.
"The authorities are trying to prod local banks by promoting broader participation of foreign players in the market," said Dong Chen, a senior banking analyst at China Securities.
After a few years of restructuring and rescue plans, Chinese banks, particularly the State-owned Big Four banks, are now able to stand on their own feet in the marketplace, but need to improve risk management, corporate governance and efficiency in a fully- competitive market environment, he said.
The Chinese Government has pumped in a combined US$60 billion as capital infusions for three of the Big Four banks in the past two years to clean up their balance sheets, but analysts say significant progress in areas such as corporate governance has yet to be seen.
"We need to promote competition, which will benefit the Chinese banking sector over the long haul," Dong said, noting domestic banks are not strong enough to compete in the international market.
A total of 71 foreign banks had set up 238 operational entities in 23 Chinese cities by the end of October, according to the CBRC. Although they still account for a small 2 per cent of total banking assets, they have grabbed a 20 per cent share in foreign-currency loans.
Foreign banks now account for 12.4 per cent of total banking assets in Shanghai, China's financial centre. Since the local currency business started opening up two years ago, foreign banks' renminbi assets have risen to 100 billion yuan (US$12.3 billion).
Source: China Daily</blockquote>
Cf.
<blockquote>Accession to the WTO, requiring further liberalization of foreign trade both in industry and agriculture, will be of enormous benefits to China, especially if exchange rate stability is maintained. Even so, China is inherently limited in the amount of financial liberalization it should undertake. Among other things, the government should restrain foreign banks from accepting RMB deposits in order to compete with domestic banks, and also restrain foreign financial institutions from undermining the capital controls by transacting freely between foreign and domestic currencies. What is the underlying problem?
For more than twenty years, the Chinese government has covered its large implicit fiscal deficits by borrowing from the state-owned banking system -- whether it be in the form of policy loans for infrastructure investments or loans to prop up loss-making state- owned enterprises. For the most part, these loans cannot, or will not, be repaid. Thus, domestic Chinese banks are encumbered with a portfolio of nonperforming loans which are the implicit debts of the government in a long run sense -- but don't bear true interest in the short and medium terms. Thus the state-owned Chinese banks are encumbered or handicapped with substantial holdings of non-interest- bearing assets.
Admitting foreign banks, which are not so encumbered, to bid for RMB deposits would not be fair competition. In the interbank market (and even at retail if deposit interest ceilings are abolished), foreign banks could bid away deposits from even well-behaved domestic banks that are encumbered. Most importantly, this would undermine the government's fiscal position as its ability to extract policy loans from the banks at low interest rates erodes. And the cost of carrying the large domestically held government debt could rise sharply if the government are forced to convert all its domestic debt into bonds traded on an open market.
Before having more competition in domestic financial markets, it is best to substantially improve the government's ability to collect taxes, which are now only about 13 percent of GDP. The conversion of existing government debt (largely in the form of loans from state- owned banks) into higher-interest, open-market bonds should also proceed gradually over several years before full liberalization. In the interim, if foreign banks or other financial institutions enter China's RMB market, the government should impose high capital and non- interest-bearing reserve requirements on them so as to create a "level playing field." For example, if it is estimated that 35 percent the loan portfolios of domestic banks is nonperforming, the People's Bank of China could impose a 35 percent reserve requirement on foreign banks and financial institutions accepting RMB deposits.
Finally, there is the major problem of maintaining prudential controls over "hot" money flows. If foreign banks are allowed to move freely between dollars and RMB, then domestic banks will clamor for the same privilege. But because of their bad loan portfolios and eroded capital positions, domestic banks have a more serious problem of moral hazard, i.e., more of a proclivity to gamble by taking exposed positions in foreign exchange. As such, like domestic banks, foreign banks may have to be restricted in foreign exchange transactions.
(Ronald McKinnon, "China's Financial Policies Upon Accession to the WTO," Perspectives, Vol. 2, No. 1, August 31, 2000, <http:// www.oycf.org/Perspectives/7_083100/china_rm.htm>) </blockquote>
Yoshie Furuhashi <http://montages.blogspot.com> <http://monthlyreview.org> <http://mrzine.org>