When China joined the World Trade Organization in 2001 committing to open its then-struggling banking1 sector2 to full competition by 2007 skeptics predicted the countrys banks would be swamped by better-capitalized foreign institutions.
This week, as leaders at the World Economic Forums annual meeting in Davos, Switzerland, debate the fiscal3 fitness of Chinas banks, it appears the doomsayers have been wrong, or at least premature4. China has injected fresh capital into its biggest banks, set up corporate5 boards with independent directors and pushed them to list abroad. Foreign investors6 have responded by putting up more than $16 billion for pieces of Chinese banks.
Few foreign banks look poised7 to take on the daunting8 task of building a vast retail9-banking network of their own from scratch. At the end of October, the assets of foreign banks were just 2% of total banking assets in China.
Instead, foreign institutions are scrambling10 to invest in Chinas banks. Chinese have poured 14 trillion yuan about 46% of the countrys gross domestic product into bank accounts each year. As income levels rise, millions more people will become attractive banking clients, says David Marshall, Fitch Ratings head analyst11 for banks and financial institutions in Asia. That is drawing the attention of foreign banks.
The lure12 for both domestic and foreign banks is Chinas undeveloped consumer-finance market. The share of consumer loans among total loans grew to 11% from 5% between 2000 and 2004.
In its WTO commitments, China promised to allow foreign banks to tap into Chinas local-currency retail-lending market and its 1.3 billion consumers at the end of 2006. Foreign banks will be able to issue yuan-denominated loans and accept yuan-denominated deposits from Chinese inpiduals. Currently, foreign banks are allowed to offer loans and accept deposits in foreign currency, and to provide yuan-denominated services to enterprises in 25 cities. But few foreign banks have built such a network with local-currency retail customers still off limits.
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