China's WTO Agreement Opens Its Banking Sector to Foreign Banks

Implications: Key Implications:

As a result of China's WTO Agreement, which grants foreign banks access to China's retail banking sector, the December 11, 2006, deadline came and went without much fanfare, as eight foreign banks sought a license to conduct retail business in China.

1. December 11, 2006, signaled a change in China, who previously restricted foreign banks from operating in China's local currency and for foreign banks seeking access and market share of China's consumer households, which surpasses $4 trillion in household savings.

2. Foreign banks possess the infrastructure and financial services products and services which has been limited with China's commercial banks, however, Chinese banks have been working diligently to eliminate bad debt, save state-run banks and launch IPOs with some of China's major banks, to prepare for the influx of foreign banks seeking to capture market share and grow their operations in China's mainland, which is expected to grow by over 10% in the next year.

3. Foreign banks see the opening of China's banking sector as an opportunity to grow their global operations and profit margins, as they contend with a decline in customer loyalty and loss of retail accounts in their respective countries and a Chinese consumer market eager to have options with financial services product and service offerings foreign banks can provide.


Analysis: Comments/Perspective:

Although China's agreement with the WTO (World Trade Organization) grants foreign banks/competitors access to China's local currency retail banking and lifts all geographic and client restrictions on operations, foreign banks must still meet Chinese regulatory requirements to conduct retail business, which is quite costly to setup a branch network, so most foreign banks are opting to form ventures and partnerships, to gain access and market share to China's burgeoning consumer households and their demand for financial services.

1. Foreign banks total market share in China is less than two percent and regulatory obstacles will prevent them from expanding in China and Beijing's WTO agreement blocks foreign banks from taking over a Chinese bank and foreign ownership of a Chinese bank is also limited.

2. Foreign banks may capture market share with corporate businesses and higher-end retail accounts (wealthy account holders) in China's international business center where most of their banking occurs, however, changes will be gradual as foreign banks transition to operating China's way and to vie for market share and Chinese banks have been working to modernize their commercial banks to stave off competition from foreign banks/competitors.