Mon, Nov 20, 2006 - Page 12 News List

Chinese reforms to give foreign banks domestic access


Chinese consumers will be the big winners from banking reforms that are expected to deliver higher-quality foreign financial services and force Chinese banks to modernize in order to compete.

Foreign banks, however, may have to wait before their entry into China pays off because of lingering restrictions and the dominance of domestic financial institutions, analysts said.

The long-awaited reforms, which were announced on Thursday and will take effect on Dec. 11, will allow foreign banks unprecedented access in the Chinese market just as the increasing ranks of the wealthy look for a safe location to put their excess cash to work.

With sophisticated products and services, foreign banks should find willing clients among savvy Chinese consumers who are tired of the stodgy array of domestic banking choices and indifferent service, industry analysts said.

"[Foreign banks] tend to be more oriented around customer service than domestic banks," said Charlene Chu of Fitch Ratings-China. "That will certainly be a major feature Chinese customers will be interested in."

Currently, foreign banks can only conduct business with Chinese companies, not individuals, and only in 25 cities. They can also offer foreign currency loans.

Following the reforms, which were required as part of China's ascension to the WTO, foreign banks will offer yuan deposits and loans and issue bank cards, placing them on the same regulatory playing field as domestic banks.

Standard Chartered, HSBC, Hang Seng and the Bank of East Asia, already experienced players in China, last week confirmed plans to plunge into the market.

Their presence will further benefit consumers by forcing improved management of domestic banks, long plagued by inefficient administration, corruption and a lack of transparency.

"Future competition will force Chinese banks to improve management and increase crisis awareness," said Wu Yonggang (吳勇剛), a banking analyst with Guotai Junan Securities (國泰君安證券) in Shanghai.

"But for the time being, the most urgent thing for Chinese banks will be how to fight foreign banks to get more customers," he said, adding that Chinese banks could be forced to bring in managers with international experience.

However, despite the reforms, foreign banks still face hurdles.

Unless they incorporate locally -- which brings its own set of tax and operational implications -- foreign banks can only offer fixed-term deposits to Chinese residents who can deposit one million yuan (US$127,033).

Even those that do incorporate locally will have trouble prying customers from the familiar grip of the entrenched domestic banks.

"Despite their increased presence, competition from foreign banks will remain limited, at least over the short term," Moody's Ratings Agency said in an analysis of the new rules.

"Because of their still-small market share, foreign banks' local operations will not present major challenges to Chinese banks," it said.

Analysts said the key to the success of the foreign banks will be whether they choose to set up as local corporations.

HSBC, among others, has said it would incorporate in China.

"Depending on whether foreign banks incorporate locally or maintain their current structure, that will determine how much choice Chinese customers have," Chu of Fitch Ratings said.

Either way, the impact on the market will be gradual, but that would ensure stability in the banking sector, Moody's said.

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