Mi Jianguo, Li Yang and Huang Jinlao

I. The Process of Opening the Service of China’s Banking Industry

As an important part of its opening-up policy, China opened its door to foreign banks long time ago. In the 21 years after the opening-up initiative, foreign banks have developed rapidly in China, approximately experiencing three stages:

First stage, since 1979, foreign banks were allowed to set up representative offices in China. In 1979, China approved the opening of the first representative office of the foreign-invested bank, Export-Import Bank of Japan. By 1980, 31 foreign financial institutions had set up their representative offices in China. This was the initial stage for the opening of China’s banking industry.

Second stage, since 1981, China approved the establishment of foreign-invested operative financial institutions. In July 1981, foreign banks were approved to set up trial operative institutions in five special economic zones, including Shenzhen, to engaged in foreign exchange business. In 1982, Nanyang Commercial Bank of Hong Kong was the first to set up its branch in Shenzhen. In September 1990, Shanghai became the coastal opening city that introduced foreign-invested operative institutions after the special economic zones. From 1992, the regions allowed to introduce such institutions were expanded to Dalian and six other coastal cities. In August 1994, such regions were expanded to 11 inland central cities including Beijing. By that time, 23 cities and Hainan Province had been permitted to introduce the service of foreign banks.

During this period, in 1983 and 1985, two regulations – "Management Measures of the People’s Bank of China for Representative Offices of Overseas-invested and Foreign-invested Financial Institutions in China" and the "Regulations of the People’s Republic of China for the Management of Foreign Banks and Sino-foreign Joint Venture Banks in Special Economic Zones" – were issued respectively to put the introduction of foreign-funded financial institutions under legal control. In January 1994, the "Regulations of the People’s Republic of China for the Management of Foreign-invested Financial Institutions" was issued, further standardizing the management of such institutions.

Third stage, since 1996, foreign-banks were allowed to handle Renminbi business on a trial basis. From December 1996 to August 1998, selected foreign banks were allowed to handle Renminbi business in Shanghai’s Pudong and Shenzhen Special Economic Zone. Its business scope includes: Renminbi deposit and credit, settlement, guarantee, treasury bonds and financial bond investment. In April 1998, the central bank approved eight foreign banks handling Renminbi business in Pudong, Shanghai to enter the inter-bank lending market of China. In January 1999, the State announced that all the central cities would allow foreign banks to set up operative banking institutions. In July, the foreign banks’ business scope in Shanghai and Shenzhen were expanded, they were allowed to do business for the customers in the adjacent provinces or autonomous regions. At the same time, the central bank also adopted a series of supportive policies to the foreign banks handling Renminbi business. Firstly, when foreign-banks are short of funds, the central bank will offer large amount financing on the basis of case-by-case approval. Secondly, the foreign banks are allowed to issue significant-amount transferable deposit certificates at an appropriate time to raise funds. Thirdly, the foreign banks are allowed to join in the issuing of renminbi syndicated loans, and the insufficient part can be borrowed from the Chinese banks. Fourthly, the foreign banks are allowed to enter national Renminbi inter-bank lending market. Fifthly, the rate of total Renminbi debt to its total foreign exchange can be relaxed from 50% to 35%.

In 1997, after the Asian financial crisis broke out, especially due to the shock of event of "Guangxin", the business expansion of foreign banks somewhat slowed down. In 1998, foreign banks’ assets shrank to 34.18 billion US dollars. In 1999, it further reduced to 31.79 US dollars. In 2000, it started to grow again. Their total assets were worth 34.6 billion US dollars.

Table 1 The growth of foreign banks’ assets in China (1991-2000)

Source: Nicholas R. Lardy, Foreign Financial Firms in Asia, April, 2001

After 20 years’ development, the number of foreign-invested financial institutions in China has been increasing, and business scope expanded. They have become an important part of China’s financial system. By the end of 1999, 87 foreign financial institutions and enterprise groups from 22 countries and regions had set up 182 operative financial institutions in China. 166 foreign banks from 38 countries and regions opened 248 representative offices. By the end of March 2001, 180 business institutions of foreign banks had been set up in China, of which, 160 were branch banks and 13 locally registered banks (including seven joint venture banks and six solely foreign-invested banks), and seven foreign financial companies. Of these banks, those from Asia accounted for 48.2% and the rest made up for 51.8%. The paid up capital was 2.68 billion U.S. dollars. The financial assets of foreign banks accounted for less than 3% of the country’s total. A total of 32 foreign banks had been approved to handle Renminbi business.

China should be one of the countries that open banking industry fast in the world. Many developed countries joined the WTO and signed service trade agreement, but they still shut their door of home currency business to foreign banks and also place regional restriction over foreign banks. Some new emerging market countries have also long banned the entry of the capital of foreign banks. Mexico adopted this policy for 57 years until October 1994, but resumed it after the financial crisis in 1995. It took 40 years for foreign banks to acquire the same treatment with local bank in Chinese Taiwan (See note 1).

The degree of penetration of foreign banking into China’s banking service market – assets of foreign banks/total assets of the banking industry – is lower than that of the new emerging economies, still at the primary level, but is quite similar to quite a few number of developed countries. In 1995, the assets of foreign banks accounted for nearly 2% of the total assets of Chinese banking industry, lower than that of most new emerging economies. But in the same period, the foreign banks’ assets in the US only account for 3% of the total, Australia and Belgium 5%, Canada 7%, France 8%, South Africa 2%, Italy, Switzerland and Norway 1%, while Denmark, the Netherlands and Sweden are 0%. Only UK (19%), Germany (25%), Spain (31) and New Zealand (91) have a higher percentage.

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