Banking Industry in China, 2005

According to the Finance and Trade Services Agreement, China about to open its banking sector to the foreign world in 2006. So China's banking sector is speeding up various reforms, and unprecedented changes have taken place in the competition pattern and operation in the banking sector. The underlying government assurance will no longer exist in banking; new measures about capital adequacy management will be implemented; classified regulation based on capital adequacy will be enforced; the speeding up of interest rate marketization reform and entry of foreign capitals will further enhance competition in the banking sector. All these will foster operation efficiency in China's banking sector.

Different from Thailand and the Philippines, foreign capitals have limited impact during the initial phase of opening up in the banking sector in China. Main bodies in the market competition will centralize on domestic commercial banks and the major way for foreign capitals to enter China is by way of joint-stock. As foreign capitals increase, interest rate differences and profitability will decline and the government's interference in the banking sector will gradually reduce. We argue that after opening of the banking sector, the biggest risk China's commercial banks will encounter is interest rate risk. The commercial banks' ability of interest rate management and relative financial innovation ability will be the key factor to acquire competition advantages. Listed banks have financing channels in the capital market. Under the support of capitals, their assets scale is expanding rapidly and have higher profitability than their counterparts.