China's WTO agreements allow foreign banks to conduct domestic yuan currency business with Chinese firms two years after its WTO accession and with Chinese individuals after five years.

With restrictions on their domestic yuan currency business being gradually lifted, foreign banks will expand their foreign exchange business and grab some market share in yuan currency transactions.

For State-owned commercial banks, that means they will lose some market shares in the local and foreign currency markets. They will have less space for their growth and the market structure will undergo a drastic change, the article said.

Now that China is a member of the WTO, international standards will be adopted to assess the assets quality and capital adequacy of the commercial banks.

The State-owned commercial banks are also at a disadvantage in terms of technical innovation. For example, e-banks have developed very fast in Western countries, but have not been commonly used by domestic banks. Foreign banks will make use of the Internet to carry out online transactions to make up for their lack of local establishments.

Domestic commercial banks lag behind in developing financial products.

Backed by their rich experience, foreign banks will be able to provide specific services that cater to the need of domestic customers to win a larger piece of the market share.

Other disadvantages of State-owned commercial banks include inferior personnel management, incentive and financial management mechanisms.

Despite these drawbacks, the State-owned commercial banks will have to compete with more powerful foreign banks in various areas, the article said.

Foreign banks will take advantage of its close relations with the international market and their better management and operations to win customers.

Most foreign financial institutions will first establish themselves in less risky businesses. They tend to expand their business after getting familiarized with domestic markets.

Businesses in the fields of money remittance, collection and credit are considered to be lucrative and will be the target of foreign banks, the article said.

They will try to win contracts for these businesses from profitable domestic sectors, such as telecommunications and transportations firms, joint-venture companies, multinationals and high-profile private enterprises.

The intermediary and retail businesses are another field in which the State-owned commercial banks will compete with their foreign counterparts.

In the past, profits of domestic banks have mainly come from depositing and credit extending transactions. These businesses can not ensure stable and secure profits.

Foreign banks are strong in intermediary and financial derivative services, which, in some cases, account for 40-50 per cent of their total transactions.

They may also scramble for retail businesses with credit cards and individual consumption credit, which are profitable and less risky.

Domestic banks will have to strengthen themselves to be capable of carrying out these businesses and to compete with their counterparts. In the talent market, they will face great pressure from their foreign competitors, the article pointed out.

It will be much easier for foreign banks to expand their businesses in China by employing local talent familiar with their indigenous environment. They generally offer better rewards and better working environments than domestic banks.

In this situation, it is urgent that State-owned commercial banks accelerate reforms to narrow the gap.

Forging co-operative pacts and merging should be properly carried out, the article suggested. The co-operative parties should have complementary business advantages to lower costs, improve efficiency, expand capital volume and ultimately enhance their competitiveness.

To sharpen their competitive edge, the State-owned commercial banks must also try to shed the burden of bad loans.

Capital assets management companies have played an important role in stripping the banks of some of their non-performing loans. But meanwhile effective measures that can solve the problem from the root must be taken, the article said.

The State-owned banks should adopt more market-oriented policies to optimize the distribution of resources. The merging and restructuring of local branches should be conducted in accordance with market demand. Efforts should be made to win strategically important customers, such as big enterprises in key sectors and major markets.

To expand their business, domestic commercial banks should seek the overall development of their transactions. More personnel, equipment and technological resources should be put into intermediary services. E-business should be improved to survive the incoming competition. To solve the problem of a lack of talent, effective incentive mechanisms must be developed. More training programmes should be provided to make employees more capable. Besides, supporting reforms in other related sectors should be carried out to facilitate the overhauling of the State-owned commercial banks.

They include reforms in accounting and taxation systems. Improvement will help those banks adopt international operational standards, the article said.

Another reform that will push forward banking reforms is the completion of the financial legal framework. The drafting of foreign-funded banking laws should be considered.

And the central bank should strengthen the supervision of foreign financial institutions. New ways of supervision should be found to effectively supervise the various financial innovations by foreign banks, the article concluded.

(China Daily January 28, 2002)