Technically insolvent, inefficient and prone to government interference, China’s largest banks are ill prepared to compete in a more competitive market post-WTO. But foreign banks will not have it all their own way.
Atop-level financial meeting was convened last month focusing on the reform of China’s commercial banking sector. The meeting, which called for improved corporate governance in banks and more diversified ownership, was the latest attempt to accelerate the pace of reform in the sector.
Three years ago, China’s banks were warned that they must change the way they conduct business. In outline, three problems were identified: government interference, putting policy objectives ahead of commercial rationale on lending; dauntingly high debt weighing on technically insolvent banks; and low management, operational and commercial capabilities.
Reform has been slow over the past decade but the prospect of World Trade Organisation membership has instilled some urgency. Once it was formally accepted into the WTO in December, a timetable for market opening locked in. As far as China’s most important trade and investment partners are concerned, the deadlines agreed for the financial sector are set in stone.
From 2004, foreign banks will be permitted to conduct business in local currency with Chinese companies. Three years later, they will be able to compete with domestic institutions in retail banking, serving both enterprises and individuals. At the same time, geographical restrictions will be lifted, allowing foreign banks to roll out their operations elsewhere in China. The regulatory and operational environment should then be equal for domestic and overseas institutions alike.