The deeper involvement of foreign banks in China's banking industry will not pose a large threat to domestic banks in the near future, experts said.
Domestic banks have a buffer period of at least five years before the market fully opens to foreign banks, said Ding Maozhan, director o f the Research Department of Beijing's Chongwen district government.

China has promised to open the market gradually, when it officially joined the World Trade Organization (WTO) on December 11 last year, Ding said.

Immediately after WTO accession, the country removed restrictions on foreign exchange clients of foreign banks and allowed them to conduct the renminbi business in Shanghai, Shenzhen, Tianjin and Dalian.

The People's Bank of China - the central bank - announced last month that foreign banks would be allowed to conduct renminbi business from yesterday in five more cities including Nanjing in Jiangsu Province, Guangzhou and Zhuhai in Guangdong Province, Qingdao in Shandong Province and Wuhan in Hubei Province.

But the bulk of the market is still off limits to them, as foreign banks are now only allowed to deal in renminbi business with foreign individuals and foreign companies, Ding said.

Foreign banks can take foreign currency deposits from Chinese citizens, but the government is not scheduled to allow individual yuan deposits until five years after its WTO accession.

China has promised to let foreign banks take yuan deposits from Chinese companies two years after becoming a WTO member.

"The fact that many Chinese clients are not used to making or withdrawing deposits from foreign banks also keeps domestic banks relatively safe in a short period," Ding said.

In Shanghai - where four State-owned commercial banks, 11 share-holding banks and 53 foreign banks are located and locked in the country's most fierce competition in this market - foreign banks' performance was quite flat during the past 12 months.

Figures from the local branch of the People's Bank of China reveal that domestic and foreign currency deposits by State-owned banks, share-holding banks and foreign banks grew a year-on-year 18 per cent, 21 per cent and 25 per cent respectively during the first nine months of this year.

The loans issued by the three types of banks during the period grew a year-on-year 10 per cent, 25 per cent and less than 1 per cent, respectively.

"Foreign banks have not yet conducted their business in a comprehensive way, as they take time to apply for business licences," said Huang Jinlao, a senior researcher with the International Financial Research Institute under the Bank of China.

"And this situation will continue for a few years yet."

But new ideas of foreign banks to operate banks, such as increasing the use of information technology in banking services and collecting fees from small depositors, have been a breath of fresh air in China's financial market.

They have also begun to show the ability to compete for high-quality clients with their Chinese counterparts.

In March, Nanjing Ericsson-Panda Mobile Telecommunication Equipment Co Ltd paid 1.99 billion yuan (US$239.7 million) in loans in advance to three major domestic banks, including the Industrial and Commercial Bank of China and Bank of China, and then accepted loans from Citibank of the United States.

"Domestic banks will have to accelerate reform if they want to build themselves up before foreign banks really pose a threat," Ding said.

Dai Xianglong, governor of the People's Bank of China, said the big four State-owned commercial banks will be transformed into large modern and strongly competitive commercial banks in around five years' time.

Some State-owned commercial banks will be restructured to become State-controlled share holding commercial banks, Dai said.

The big four will be listed on the stock market when the time is ripe, he said.

"Dai's remarks suggest that the big four banks' share-holding reform and eventual listing have become inevitable," Ding said.

But the banks will have to lower the rate of non-performing loans, get rid of historical financial burdens and raise their capital adequacy to international standards.

The country's commercial bank law stipulates that commercial banks' capital adequacy ratio will have to reach 8 per cent, the minimum required by the Basel agreement reached by international banking managers.

"Chinese commercial banks will have to reduce the amount of risk assets," Ding said.

()