A week later, the Hong Kong and Shanghai Banking Corporation (HSBC) became the first overseas bank to run similar services in Beijing.

As China's central bank gave the green light to overseas banks to provide Chinese customers with forex services early this year, the foreign players are not the only ones to hear the clarion call.

On March 25, China UnionPay Co Ltd set up in Shanghai with the aim of building a unified national electronic bank network to allow any bank card holders to use their card at any terminal throughout the country. The big four State-owned commercial banks are among the first 85 domestic shareholders.

The rationale behind the recent moves of the domestic banks is clear: The World Trade Organization (WTO) time schedule for China's banking sector is pushing them into a race for survival and eventual success in the huge Chinese market.

By the end of 2001, domestic financial institutions had accumulated US$134.8 billion worth of foreign currency savings and the equivalent of US$1.7 trillion in yuan savings, according to statistics released by the People's Bank of China early 2001.

Under its commitment to the WTO, China has agreed to gradually ease geographic and client restrictions on overseas banks. Restrictions on overseas banks to conduct foreign exchange business will be completely erased this year. Within two years of WTO entry, overseas banks will be allowed to provide local-currency services for local corporate clients and will be given permission to operate full domestic currency business within five years.

Domestic and overseas banks are in the same race, yet it seems they are pursuing a different course.

The networking of domestic bank cards is obviously a move to explore new banking service items. By the end of the year, ATMs and POS machines in 100 cities will be linked and a cross-region and cross-bank system will be established.

And the ensuing convenience brought by compatible automatic teller machiness and point-of-sale machines around the country will make the banking card more appealing to local customers, which will help major Chinese banks cement their current share of the home market.

However, while domestic banks may boast of their huge, nationwide and far-reaching network, their overseas rivals are targeting high-end individual clients.

The first client that Sanford Weill, chairman and the chief executive officer of Citibank parent Citigroup, received at the launch of its first consumer service branch in Shanghai, was Tang Haisong, CEO of Etang, a Shanghai-headquartered dot.com company with offices in Beijing, Guangzhou, and Boston in the United States.

He is just one of the high-end clients clustered in coastal areas, where foreign banks have already set their targets. There is a great possibility that overseas banks will get the cream of the banking sector with their wealth of experience, quality services, advanced management and operational efficiency.

Although last week Ericsson's Nanjing Branch cleared the rumour that it withdrew loan business from a home bank and turned to an overseas one, it is nearly inevitable that some joint ventures will go to overseas banks. The loss of good liquidity will pose a huge challenge to home banks which are still suffering from a heavy volume of non-performing loans (NPLs). At the end of last year, the ratio of NPLs in State commercial banks reached 25.37 percent, which may be over 10 times higher than that of their foreign rivals.

It is projected that within 10 years after China's entry into the WTO, the market share of foreign banks will rise from the current 2 percent to 20-30 percent.

However, the picture is not that grim for domestic banks.

The five-year transitional period will cushion domestic banking institutions from fatal hits, and the question is how fast they can get ahead.

The domestic banking sector should focus on restructuring and raise its core competitive edge.

To narrow the gap between domestic banks and their overseas rivals in terms of services, financial innovation is imperative. Overseas banks in the Chinese market are all experienced international players and they can provide clients with tailored portfolios including various banking and insurance items. If domestic banks fail to come up with competitive services, legions of high-end individual and corporate clients will turn to overseas banks once the latter get full national treatment in 2006.

Besides introducing new service items, the biggest chance for domestic banks may be in the booming mortgage market.

To the end of June last year, total housing mortgage loans stood at 445.4 billion yuan (US$53.85 billion), 23 times the total recorded at the end of 1997.

Compared with corporate lending, mortgage lending is certainly a better risk. The NPL ratio of mortgage lending is around 1 percent, which will constitute good liquidity for banks and help them with recapitalization.

Moreover, mortgage lending often means long-term relationships between the clients and banks. With quality services, the banks can build consumer loyalty.

Other private services such as credit loans for car buying, education and medical care also have bright prospects for domestic banks.

If domestic banks can clinch and hold this big private credit market with the five-year head start, they will be better positioned to withstand the international competition.

(People's Daily April 03, 2002)