Picking up the gauntlet: Bank competition in China after World Trade Organization entry

Abstract

Ericsson (Nanjing)'s transfer from Chinese banks to Citibank (China) in March 2002 shocked the Chinese banking community and forced an early awareness of the realities of international competition in China's banking industry. Ericsson moved due to the lack of factoring by Chinese banks and the ability of foreign banks to offer more services specialised to international accounts. Chinese banks have no factoring experience, no national credit checking, and operate under government-mandated separation of banking and insurance industries. Foreign banks operate in an environment favouring service integrations and they have extensive experience offering single-source banking, insurance and investment services. Currently, Chinese banks are required to service the unprofitable rural areas of China while foreign competitors concentrate on the more lucrative urban areas. With increasing trade and mounting competitive forces resulting from the 2001 entry into the World Trade Organization (WTO), Chinese banking regulators are expected to ease regulations on Chinese banks. Although penetration of Chinese banks into the foreign competitors' niche may be currently untenable, Chinese banks can capitalise on state-owned and local firms in anticipation of growing with the Chinese economy. These intimate associations allow Chinese banks to assess lending risks to locals and use a common communication and cultural basis to service the market effectively. To protect this rural market, a Chinese central bank is forming to unify the domestic credit card settlements and provide a national backbone for intrabank communications, risk management and market analysis. Chinese banks must introduce Western-style banking services and operations, follow national enterprises abroad and increase international commerce capabilities through cooperative alliances.