China opens to foreign banks -- A big long-term impact

December 13, 2006

On Monday, December 11, China opened its banking markets to foreign competitors, complying with its membership in the World Trade Organization (WTO). China’s financial markets are worth $5.2 trillion in assets. Previously banks were only allowed to open branches in 24 major cities. Foreign banks have assets of $100 billion in China, but account for only 1.9% of total bank assets in China.

However, only large banks can afford the costs to incorporate locally. They must also undergo the often lengthy approval process by Chinese banking authorities, and will be regulated by these authorities once opened.

What foreign banking in China means:
Although foreign banks may never convince loyal Chinese savers to switch, the increased competition has improved the Chinese banking system, which is loaded with bad business practices. Many Chinese banks have gotten government bailouts to write off bad loans, while others have looked to foreign joint ventures to help increase their assets and import good banking practices.

Action steps:
The banks that will benefit are major international banks, such as Citigroup, HSBC and Deutsche Bank. You are likely to already own these if you have any large cap financial funds....but just check with your financial advisor to be sure.

Do not go out and buy a large stake in any single company’s stock. The benefits of China’s big change will not appear for a long time.

Source: Source: China People’s Daily Online, “Total Assets of Foreign Funded Banks in China Exceed $100 bln”, November 16, 2006; “New Regulations on Foreign Lenders Will Prove Smooth Transition”, November 15, 2006