Nanjing Ericsson Communication Co., Ltd., for example, has shifted most of its business involving 1.99 billion yuan (US$0.24 billion) of bank loans to Citibank Shanghai from Bank of Communications. This case has been dubbed as 'Ericsson Incident' by the Chinese media.

The shift was largely due to the fact that Chinese banks haven't the service of account receivable transfer without recourse. According to Bank of Communications, Ericsson applied for the service to the bank, whereby the bank was expected to buy its account receivable and assume the risk of collectibility and absorb any credit loss.

To put it another way, if the bank were to pay 30 million yuan (US$3.624 million) for 50 million yuan (US$6.04 million) of Ericsson's credit, which should be paid by other enterprises before a specified future date, the bank would lose 10 million yuan (US$1.208 million) if collecting only 20 million yuan (US$2.416 million) or would earn 10 million yuan if collecting 40 million yuan (US$4.832 million).

Since domestic insurance companies can't provide the bank with credit insurance [banks and insurance companies share rights and risks in the service of account receivable transfer without recourse according to international practice], Chinese banks can't handle Ericsson's application due to extreme risk, pushing Ericsson to foreign banks.

The incident sheds light on foreign banks' interest after China's WTO entry -- to serve its high-end customers with their advantageous full service and banking technologies, instead of traditional products and service.

In China, the major four state-owned commercial banks have developed on a large scale with an extensive capability featuring several thousand branches and a nationwide computerized network of payment and settlement. Foreign banks will avoid competition in this regard in the initial stage of their China development. They will mainly rely on the service, which their Chinese counterparts can't yet offer or are reluctant to offer due to various reasons.

It's estimated that foreign banks have 214 offices and 190 operational branches in China. In addition 30 foreign banks have been allowed to handle Renmibi business, with a RMB assets of 45 billion yuan (US$5.436 billion) and involving 39 billion yuan (US$4.712 billion) of bank loans. It's expected that bigger breakthroughs will be achieved by foreign banks since Chinese banking sector is gradually opening to the outside within five years to come.

The strategy of Citibank and HSBC Group in China has revealed that foreign banks have focused their attention on high-end customers. Ericsson Nanjing Branch, for instance, has sound production and sales records.

In the past year, Chinese banks were busy preparing for the challenges in the wake of China's WTO entry. And initial results have been achieved. By the end of 2001 state-owned Chinese banks had witnessed a decrease of 90.7 billion yuan (US$10.958 billion) in bad debts and 3.81 percent decrease in the bad debt ratio. Moreover, starting from January, five cities including Beijing in China have introduced the unified bank card, and the unified national payment system will be realized in 100 cities this year. Meanwhile, the four commercial banks made attempts to improve their management.

Despite these, the Ericsson Incident exposes the problems of Chinese banks. General Manager Feng Jiansong of the Business Dept. of China Minsheng Banking Corp. said Chinese banks are far behind in terms of modern management concept and aren't flexible enough to adapt to challenges and changes for new products and service. They also lack competitive products to keep customers loyal. Meanwhile, Chinese banks make provisions for the handling financial risks in business innovation.