Chinese Banks Warned Over WTO Entry

by Mary Swire, Tax-News.com, Hong Kong

22 June 2001

The President of the Bank of China, Liu Mingkang, has warned that domestic banks face a huge threat from foreign institutions when China joins the World Trade Organisation, it was revealed recently. The country, which is expected to join the WTO by the end of this year or the beginning of 2002, is having an interesting time at the moment.

Within the last few weeks, the Chinese tax authorities have announced that there will be far-reaching reform of the income taxation system, a study has revealed that Hong Kong is in all probability being used to launder vast sums from the Chinese mainland, and the country has become mired in a dispute with Japan over import tax rates. To say that the financial services sectors have had a lot on their minds recently would be to understate the case. However, Mr Liu's recent gloomy predictions have given the industry a little more food for thought.

The Bank of China president warns that foreign banks could end up with over half of the Chinese domestic market for fee-based banking services after China joins the WTO, stating that foreign banks have a competitive advantage in 'intermediary areas' such as trade financing, credit card transactions and cash management. Mr Liu predicts that ten to fifteen years after entry, foreign banks will have captured 15% of the market for foreign exchange deposits, 10% of yuan deposits, 20-30% of foreign exchange loans, and 15% of yuan loans. He also predicts that foreign banks will poach talent from their Chinese counterparts, and could end up luring away up to 20% of staff at domestic banks with college degrees.

However, there is (apparently) a silver lining in all of this. Although foreign banks will be more competitive in terms of foreign exchange business and online banking, Mr Liu believes that the large branch networks already in existence may give Chinese banks some advantage. However, he believes that in the actual event there will be a fierce and protracted battle for quality clients such as multinationals and joint ventures.

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