The banking sector is a key anchor in the financial services trade. During the 15-year negotiations on China's entry into the World Trade Organization (WTO), three years were devoted to the negotiations relating to the banking industry.

As China is experiencing a transition to full compliance with WTO rules, the limits on foreign banks' market access and restrictions on their operations will be gradually eliminated, which will inevitably lead to fierce competition between home banks and their foreign counterparts.

In line with China's commitments, for example, foreign banks will be allowed to offer yuan currency business to local corporate clients within two years of China's WTO entry.

All of the geographic and client restrictions on foreign banks will be eased and they will be given permission to conduct full domestic currency operations five years after the accession.

During the transition period, domestic banks will not only be subject to internal financial regulations but will also be put under the restraint of WTO rules and international practices, the article said.

Besides WTO rules, the home banking sector has to conform to the Basle Accord, the most important internationally-accepted standards in the trade.

A key part of the Basle Accord framework is the International Convergence of Capital Measurement and Capital Standards, or the Basle Capital Accord introduced in 1988. The Basle Accord established an 8 percent minimum (weighted) capital adequacy standard for international banks.

To mend the flaws in the accord, a New Capital Adequacy Framework was issued by the Basle Committee in 1999. In order to control risks for modern banks, it incorporates three mutually reinforcing mechanisms -- minimum regulatory capital requirements, supervisory review of capital adequacy and market discipline.

If a country fails to meet the requirements in the Basle Accord, it will receive discriminative treatment in the global financial market.

Thus, institutional reforms are necessary, and it is pressing for home players to adopt the above international practices and standards, the article said.

The twisted phenomenon of the co-existence of super-national-treatment and under-national-treatment for foreign banks should be eliminated.

In taxation, service charges and financial supervision, foreign banks enjoy favourable policies. But in the meantime, restrictions are imposed on foreign banks over their scope of services and market entry.

In December 2001, the State Council introduced the Regulations on Administration of Foreign-Invested Financial Institutions. With eased restrictions on the operation of foreign banks, it will help end the under-national-treatment of such banks.

And the new regulations also endorse the prudential supervision on foreign banks in line with the Basle Accord, which will help end the super-national treatment of foreign banks.

Achieving domestic banks' smooth incorporation of international standards and rules calls for concerted efforts from the government, the central bank and commercial banks.

The government should be the first to take the initiative. It has a responsibility to abolish laws and regulations that are in discord with WTO rules. By the end of 2001, six batches of financial regulations had been invalidated.

To complete the legal framework for the financial industry, the government should work out new rules and regulations to govern business activities of banks. For medium-and-small financial institutions' merger and acquisition needs, for example, the introduction of merger laws is required, the article suggested.

In November last year, the State Council issued the Financial Institution Revocation Provision, which gives guidance for banks' withdrawal from the market.

The central bank should provide policy support for the banking sectors' transition and development. It should encourage commercial banks to engage in financial innovation on the basis of legal operations and prudent management and foster a competitive banking system.

From the perspective of commercial banks, as they constitute the biggest chunk of the banking system, any reform and innovation conducted by commercial banks will serve as the technical basis for the whole sector's smooth transformation.

During the transition, they can adopt a multi-dimensional development regime, the article suggested.

While entrenching their position in the field of traditional services, commercial banks should target and develop new service products.

Domestic banks have to expand their savings business, strengthen the management of loans and readjust their assets structure to increase the holding of bonds instead of cash.

They also should target niche markets, search for optimal marketing portfolios and raise their share of the new services market.

At present, consumption loans only account for around 4-5 percent of domestic commercial banks' total lending, far behind the 20-25 percent share in Western developed countries. Such a huge gap reflects that there is a broad market potential for consumption credit.

Intermediary business -- ranging from financial derivatives and investment fund management to financial consultations -- will also provide opportunities for domestic banks.

Cooperation between domestic commercial banks and their foreign counterparts is inevitable, which will be the catalyst for internationalization and financial innovation in the banking sector.

(China Daily May 08, 2002)