By Yi Xianrong

The Regulation on Administration of Foreign-funded Banks, issued by the China Banking Regulatory Commission (CBRC), came into effect on Monday.

That day, the CBRC announced it had received applications from eight foreign banks to turn their operations in China into locally registered corporations.

The new regulation is in line with China's entry commitment to the World Trade Organization (WTO) in 2001. It is also an important step for the Chinese banking industry towards further opening up.

The new regulation will have a significant influence on the long-term development of the country's financial industry, especially the banking sector. But they will not deal a huge shock to domestic banks and there is no need for Chinese banks to panic about the coming competition.

Despite the fact that China's banking sector has been open for a long time and foreign banks have seen their businesses grow, the latest statistics from the CBRC indicate the total assets of foreign banks in China, in renminbi and other currencies, amounted to US$105.1 billion by the end of September 1.9 percent of the total assets of all financial institutions in China.

The low proportion of financial assets gives foreign banks little leverage to shake the country's financial market.

The regulation on foreign-funded banks aims to seek a new balance between fulfilling China's WTO commitment and protecting the interests of domestic banks and customers.

The authorities have resorted to a preferential policy for foreign-funded banks registered as legal entities within China.

Under this policy, foreign banks are free to choose their own forms of commercial operation, but the authorities encourage those with an extensive network of retail services, and those that are willing to start their retail services in renminbi, to register their Chinese branches as legal entities in this country.

Foreign banks can make their own choices in penetrating the Chinese market. Different choices incur different criteria in terms of market access and supervision. Thus, they have greater control over the risks of tapping a new market.

Foreign banks that set up their operations in China, the CBRC stressed, will be subject to the same supervision and market access as their Chinese counterparts.

The CBRC has also emphasized a prudential supervision principle and it is planning to regulate the risk-control of the whole banking industry with a set of statistic indexes.

Foreign banks would have extra preferential treatment if they invest in the central and western parts of the country, where the financial services are relatively underdeveloped.

The entry of foreign banks to the Chinese market has been inevitable since the nation launched a reform in the late 1970s. The opening-up has restructured the banking industry and propelled the development of the financial sector. The financial market, financial products and services are being reshaped.

There are worries that foreign banks could grip market share and take away high-end clients and top managers from domestic banks.

But these concerns are unnecessary.

The banking sector is under the influence of the government and a large part of the financial assets are held by State-owned banks. But competition based on the market has already developed between Chinese banks and each of them occupies a specific position in the market in accordance with their competitive edge.

It will not be easy for foreign banks to get a foothold in the market if they do not choose the right strategy in localization. Judging by the current market share of foreign banks, it will take quite some time for them to squeeze into the market or shake off their Chinese competitors.

True, many foreign banks have richer experience or better techniques in services, financial products, corporate governance and risk control.

However, financial products are not patented in any form. New products and services can easily be copied or imitated. Therefore, foreign banks may quickly lose the competitive advantage of new financial services after their competitors make the necessary moves to catch up like offering similar services.

Concerns over foreign banks dragging talents from domestic competitors are not baseless. But this was only likely to happen two decades ago.

China has seen a higher-education boom in recent years, so financial talents have also increased in number. Even if some of them took jobs in foreign banks, it would not change the overall layout of financial talents, because foreign banks would take a very small proportion of the total banking assets of this country.

Moreover, domestic banks now offer much higher wages to their employees since their reform and financial restructure. The gap between salaries at foreign and domestic banks is no longer as big as it used to be.

Foreign banks are no longer as attractive to financial talents, and some foreign bank managers who left domestic banks years ago are now returning to Chinese lenders.

Therefore, foreign banks are unlikely to pose a threat to domestic banks by drawing talents from them.

The new regulation will not create much disturbance to the financial market, nor will the entry of foreign banks to the retail business affect customers.

The only change is that the banking sector will see more vibrant development, with new market players competing to provide better financial services for customers.

(China Daily December 15, 2006)