China's Banking Industry

The first few years of the twentieth century have seen European and American banks bidding against each other for stakes in some of China's biggest lenders. This follows Beijing's decision in 2003 to allow eligible foreign banks to provide Renminbi services to local businesses and individuals. In order to fulfil its WTO regulations, China is required to fully open its banking sector, including consumer and corporate banking services, to foreign competition by 2007. China joined the WTO in late 2001, but has been given a 5-year grace period before all its membership regulations come into force. As China gradually begins to liberalise its banking industry, it is also reaping the benefits of Western financial expertise and experience, while Western banks in turn enjoy access to China's rapidly expanding financial services market.

Currently, foreign banks are only allowed to operate in 18 Chinese cities, but Beijing is keen to open new banking services in the west, north-east and central regions, to fit in with its investment plans for the country's less affluent areas. By 2007, foreign banks will be able to process yuan transactions in 25 cities, including Harbin, Nanning and Ningbo. Among Beijing's proposals to make it easier for foreign banks to do business in China is the plan to reduce the capital threshold for foreign banks wishing to open in China from $62m to $50m. Perhaps more important is the Chinese government's decision to stop aiding failing domestic banks. The government has been propping up domestic banks by paying for their losses, an expense which China can now be rid of. The China Banking Regulatory Commission (CBRC) has been pushing this forward for some time in an effort to encourage foreign banks to invest in China's troubled banking sector.

There is debate over the value of China's banks. Some foreign analysts claim that Western banks will encounter numerous problems by buying into their Chinese counterparts as a result of their notorious bad debt problems exacerbated by years of state-controlled lending. Despite these warnings, however, many Western banks are queuing up for a slice of China's wealth. The Chinese market is estimated to hold $1.5 trillion in personal savings. It is not surprising then that banks such as RBS and HSBC are keen to start selling consumer banking services to China's 1.2 billion and rising population.

In recent years, both Royal Bank of Scotland and HSBC have made large investments in China's financial sector. In 2004, HSBC bought a 19% stake in China's Bank of Communications, a deal worth $1.7 billion. In 2005, Europe's biggest lender RBS stood firm in its decision to invest $3.1 billion in the Bank of China, amongst avid speculation concerning the profitability of the deal. Other European and American banks have continued to follow the China trend, though not all have decided to buy stakes in Chinese banks. In December 2005, Barclays opened its first branch in Mainland China. Its Shanghai office will offer foreign exchange services as well as advice on risk management and debt financing. Barclays is keen to increase its earnings abroad, and has earmarked Asia - China in particular - as its most important target market. As China increasingly becomes the market that businesses are most excited about, the coming years will see a surge in investments by Western banks keen to gain a solid foothold in the banking industry.

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