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China: The long march to compete post-WTO

Even after China has joined the World Trade Organization, there will be a grace period of five years before foreign banks can compete head-on with local banks. But that still represents an ambitious timetable for reform. There has been progress, but the sheer scale of China’s banking system, the need to adopt new accounting standards and the number of bad loans present hurdles.

Author: Gill Baker

China's banking system faces the kinds of challenges being grappled with by bankers worldwide - except that the sheer size of its industry presents a new level of complexity. The analogy of the oil tanker that needs a lot of space and time to change course is particularly apt in China's case. And the task is made more daunting still by the need to get reform in place before World Trade Organization rules come into force, thereby opening up the market to a wave of international banks with massive experience and powerful brands.

The timeframe for the PRC's entry is still hazy, although most commentators are reckoning on the end of this year. Nevertheless it has focused the minds of bankers and regulators to a sufficient degree for a raft of new rules to be issued in an attempt to strengthen balance sheets and clean up institutions ready for the arrival of international competition.

There is not going to be a sudden takeover of the mainland's banking industry by foreign players. In the first two years of the WTO regime, banks will not be affected at all. After that, investment banking will be opened up to foreign competition, but that should have little impact on domestic institutions, which tend to focus more on retail and commercial business anyway.

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