The muted impact of China WTO reforms

Bankers are excited about WTO regulations for financial services but are taking a longer-term view.
Every generation or two a piece of international legislation has the ability to transform the economic landscape of a country. For China, its 2001 ascension to the World Trade Organisation (WTO) truly marked its arrival on the international scene and, for the banking sector, both domestic and foreign, spelled an era where both new opportunities and challenges would emerge.

On 11 December this year, ChinaÆs banking market will open completely to foreign players. While there are still a few regulatory hurdles and administration problems to be ironed out, foreign banks already smell immense opportunity once these barriers are lifted.

Between now and 2010, China is expected to account for one-third of all international bank revenues. Deposits in Guangdong province alone already exceed the entire deposit base in Australia.

ôThe WTO lifting marks a tremendous opportunity for banks in China, but the question that needs to be addressed is whether it is opening up or not,ö says Thomas Achhorner, regional head of IT and financial service at Boston Consulting Group.

This question is also posed by KK Tse, executive vice president at State Street in Hong Kong. As a custodian and provider of fund services, Tse is quick to see the potential benefits that WTO reforms will have on State StreetÆs business, but remarks that ChinaÆs fund industry has a long way to travel before approaching the maturity of other markets.

ôIf you compare the asset pool in China and even an industry like the mutual funds market, it is not comparable to the US and other regional markets,ö says Tse. ôWith this in mind, we will still be focusing on China and looking to execute a strategy that will take on greater forms in 10-20 year's time. WTO may not effect the fund services business too much, but the strategic opportunity is important to establish early on.ö

Other banking businesses have also reacted with a degree of skepticism to ChinaÆs new WTO obligations for the financial services industry. Richard Yorke, chief executive officer of HSBC China, acknowledges that the event will be an important milestone for ChinaÆs financial sector as foreign financial institutions will be able to access the mass market for the first time by providing local RMB services to Chinese citizens. However, he points to the significant investments required to set up branch networks and, like Tse, suggests that the new regulations will make long-term goals easier to attain.

ôHSBCÆs commitment to China is demonstrated by our 140-year continuous presence in the Mainland, but we believe that long-term commitment is key for foreign banks to succeed in China,ö he says. ôThe biggest opportunity which foreign banks are eyeing is the ability to tap into the huge potential of the local retail banking market which holds approximately $1.8 billion worth of deposits. But in such a large market, we believe that focus will be very important and at HSBC we don't think it is realistic to compete for the entire consumer banking pie.ö

One change that is likely to be brought on by the WTO regulations will be increased transparency and better international standards like corporate governance.

ôThe WTO has had a trigger effect for widespread changes in the China banking market and its impact has been profound for domestic banks like us,ö says Qian Ouyang, executive vice president of China Citic Bank. ôIt will bring the sector up to international standards and help the industry in manage risk.ö
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