Foreign banks are likely to set up branches mainly in the economically developed coastal areas, rather than reflecting the development of domestic banks, which have set up branches across the nation.

As a result, China's major cities will become the focus of competition between foreign and domestic banks.

Foreign banks that enter the domestic market do not develop their business outlets in an even fashion.

Development of the online banking sector is one way that foreign banks are expanding their market share.

An investigation by the survey company AC Nielson suggested that 23 per cent of the people who frequently surfed the Internet, around 2.5 million people, were expected to become online banking customers.

The cost of online banking for a single deal was about 0.01 yuan (0.012 US cent), which was much lower than the 1.07 yuan (10 US cents) demanded by traditional banking businesses and 0.45 yuan (0.5 US cent) demanded by telephone banking.

Foreign banks such as Bank of East Asia and Citibank have all given great attention to the development of their online banking businesses in China.

However, only about 50 domestic bank branches have opened online banking business. They only had 1,000 individual and enterprise online banking customers.

Mature

Compared with domestic banks, foreign banks were more mature and had more experience and strong technical support for online banking.

At present, foreign banks badly need business licenses.

After they obtain these licenses, foreign banks will be able to quickly expand their businesses by copying similar operations in other countries.

Foreign banks have also started to buy stakes in domestic banks, in order to enter the market as quickly and cheaply as possible.

They have bought stakes in the Everbright Bank, Shanghai Bank, Nanjing City Commercial Bank, Xi'an City Commercial Bank and Shenzhen Commercial Bank.

Foreign banks are now talking with the Pudong Development Bank, the Bank of Communications, Chengdu City Commercial Bank and eight cities' commercial banks in East China's Zhejiang Province to buy stakes in these banks.

This situation suggests that foreign financial institutions have accelerated their entry into the Chinese market.

Rather than competing merely for the market shares in traditional business such as loans and deposits, foreign financial institutions will also compete fiercely on non-interest business such as settlement and personal banking.

Foreign banks will try to increase their market shares by taking advantage of their strength in product creation, marketing and funds operation.

This poses a great threat to domestic banks, unless they increase their operations and improve their marketing.

Foreign banks had already taken a large market share in international settlement.

Foreign banks' competition is also likely to have a major impact on domestic banks in the fields of personal and online banking.

Development

After years of development, domestic banks have hired a large number of personal banking specialists and also created a certain number of new products.

They also have set up special institutions to deal with the personal banking business.

However, domestic banks are still at an early stage with this sort of business.

Along with the lifting of restriction on customers, foreign banks will fight fiercely for high-quality customers.

The world's top 500 companies, which have set up offices or joint ventures in China, will undoubtedly become their major targets.

Some State-owned and private companies with better financial performance will also become their targets.

Foreign companies, which have had a strong relationship with these foreign banks, may also decide to invest with these banks.

This phenomenon has been quite obvious among companies from Japan and the Republic of Korea.

The competition will result in the redistribution of the high-quality customers among domestic and foreign banks.

This will lead to a profit instability for domestic banks.

For the retailing business, foreign banks have only brought in limited impact on domestic banks at present, because there are still 5 years before the country opens the sector to foreign banks.

But this does not mean that domestic banks are always safe.

In recent years, people's idea of consumption has radically changed. More and more people have begun to take advantage of consumption credit to buy goods.

The fall in car prices following China's accession to the World Trade Organization will also encourage people to buy cars.

Non-banking foreign financial institutions will participate in competition.

They will have great impact on domestic banks because of their strong competitiveness in this area.

Besides, along with the rapid development of the country's economy and the maturity of the real estate market, more people will buy private homes through mortgage lending.

Foreign banks, which have much experience in offering the loans and have strong customer management method, would attract a large amount of high-income people.

As more and more foreign banks are allowed to deal in renminbi business, competition for local companies is becoming increasingly stronger.

By the end of September last year, 45 foreign banks were approved by the central People's Bank of China to deal in renminbi business.

Foreign banks' renminbi assets had reached 47.8 billion yuan (US$5.8 billion) by that time.

As of December 1 last year, foreign banks were allowed to deal in renminbi business in five more cities - Qingdao in East China's Shandong Province, Nanjing in East China's Jiangsu Province, Wuhan in Central China's Hubei Province, and Guangzhou and Zhuhai in South China's Guangdong Province.

The country has already allowed them to conduct renminbi business in Shanghai, Shenzhen, Tianjin and Dalian, after China officially joined the World Trade Organization (WTO) on December 11, 2001.

Borrowing

In Tianjin, foreign banks have already grabbed a certain amount of domestic companies, which previously borrowed from domestic banks.

With the further opening of the renminbi business, foreign banks' renminbi assets will become even stronger. Their performance in the Chinese market will also become stronger.

At present, foreign banks are not fighting to recruit personnel from domestic banks.

But as their business expands in an all-around way in the coming years, they will offer higher salaries and other favourable treatment to compete for quality personnel.

To increase domestic banks' competitiveness, they should speed up the shareholding reform, so that they can operate in accordance with the market demands.

The successful reshuffle and listing of the Bank of China (Hong Kong) was a good example for domestic banks, especially State-owned banks, to improve their corporate governance.

On the other hand, the government should also try to reduce the tax burden for domestic banks.

Domestic banks now bear a 33 per cent income tax and 5 per cent business tax.

But the income tax for foreign banks was only 15 per cent.

In many foreign countries, the government did not levy business tax for banks.

Domestic banks should try to attract more quality personnel, establish risk-control mechanism, improve the internal controls and speed up adjustment of their business and personnel structures.

Meanwhile, the government should encourage co-operation between different domestic banks to increase the overall competitiveness.

(China Daily March 10, 2003)