Reform of the Chinese banking sector has noticeably accelerated as the nation entered its third year of World Trade Organization (WTO) accession.

The central government has decided on a long-awaited reform scheme for the four State-owned commercial banks, which many believe would include massive capital injections, restructuring involving foreign investors, and stock listings.

A heightened sense of urgency with banking regulators was palpable when Tang Shuangning, vice-chairman of the China Banking Regulatory Commission (CBRC), addressed a conference in November.

"Before 2006 (when China fully opens up the banking sector), if we do not... improve the comprehensive competitiveness of Chinese banks, especially the four State-owned commercial banks, the gap between Chinese and foreign banks will broaden," he said. "The results will not only include a huge impact on Chinese banks, but a delay to the process of reform and development, therefore bringing grave consequences to the entire economy."

Chinese banks are lagging way behind their foreign competitors in key areas like corporate governance, capital adequacy, asset quality as well as innovation capability.

But the opening process is faster than they would like to see. In the latest step, China has allowed foreign banks to provide renminbi services to Chinese businesses in all of the 13 key cities as of last Monday. They are still not allowed to conduct renminbi business with individual Chinese clients.

The access to renminbi services for Chinese businesses marks a significant step for foreign banks in terms of influence in the Chinese economy, said Wang Yuanhong, a senior analyst with State Information Centre.

"Now they have directly entered the economic cycle," he said. "Their integration with the financial industry has moved to a higher level, and their economic influence is bound to increase."

Although foreign banks are not likely to significantly revise the financial landscape in the near term, Chinese banks need to catch up quickly to reduce the possible impact, Wang said.

"Their advances are unlikely to be too fast, as there are still geographical restrictions and they do not have the outlets."

Eighty-four of the 191 foreign banks operating in China now hold a renminbi license. They saw their profits from renminbi operations soar by 37 percent on a year-on-year basis in the first 10 months of this year, official statistics indicated.

"Of course we need to acknowledge that foreign banks bring management expertise and better technologies, which will help domestic banks improve their competitiveness," Wang added.

Next year, China is expected to open three more cities to foreign banks, including Beijing.

Chinese insurance companies face a similar situation, with huge gaps with foreign insurers in terms of both expertise and scale.

But the door kept opening wider and wider under the nation's commitments, with foreign insurers streaming in to either set up shop on their own, or form joint ventures with local partners to provide both property and life insurance products.

Nearly 40 foreign insurance companies have set up operational entities in 13 Chinese cities. Some cities, including Beijing and Chongqing, were opened months before the deadline - the end of this year.

"The pace of the arrivals has been quick," said Tuo Guozhu, a professor with the Beijing-based Capital University of Economics and Business.

Many foreign insurers, however, have seen slower growth than they would like, largely due to differences with their local partners in terms of development strategy, he said.

But they presumably will see faster growth next year, as China, under its WTO commitments, removes all geographical restrictions and opens up health, group insurance and annuities products

(China Daily December 11, 2003)