Comparative analysis of commercial banking system reforms in China and the United States

Accession to WTO in 2001, made the China baking industry open to the global competition given in the time frame of 5 years. Chinese banks were notorious for their mounting non-performing loans and low efficiency. Even though Chinese banking industry was injected with procedural reforms and regulatory amendments still it was faced with state ownership dominance and monopolistic controls. Therefore the concern facing the banking industry of China was what measures to be adopted for increasing the efficiency of banking industry most importantly the state owned commercial banks that covers the largest share of the market [footnoteRef:1]. [1: CBRC, 'The Non-performing Loan of Major Commercial Banks in China' [2009] 3 accessed 19 March 19, 2011]

Since U.S. financial industry is one of the leading in the global market therefore it can provide a guideline to the Chinese emerging banking industry in their way of restructuring and reformation of financial industry. The backbone of any financial industry is the banking sector therefore strengthening the banking industry mean flourishing the financial industry. For the purpose of intensification of the domestic banking industry it is important to gauge the internal environment of the country as well as scrutinizing the international elements that affect the performance of the domestic industry[footnoteRef:2]. Comparison between U.S. And China banking industry can give us some insight regarding the strategies for the development financial power. [2: RWolfrum and P. Stoll and M. Koebele, WTO -- trade remedies: General Agreement on Tariffs and Trade (BRILL 2008)]

COMPARISON MADE ON THE SETTING UP OF BANKING INDUSTRY BETWEEN U.S. AND CHINA

The comparison made between the banking industry of U.S. And china is focused broadly on three parameters namely comparison of goals, comparison of modes and comparison of results.

COMPARISON OF GOALS

Attaining the financial liberalization and collective welfare of the economy are the two core goals of the financial industry. Developing economies are in search for attracting investment for their economic development whereas developed economies who are rich in capital are seeking a profitable investment even in the developing economies. The imbalance of financial power is the decisive factor for financial liberalization. Signing of the agreement has not significantly impacted the U.S. financial market however it has created opportunities through multi-trade agreement to trade in countries with limited barriers. The consequent effect of openness agreement has transformed the Chinese banking industry from planed economy to market-based economy[footnoteRef:3] . Chinese economy does have some powerful players in the banking sector but the government's unwelcomed intervention with policy regulation has prohibited the growth of the banking sector. Therefore international competition in the banking industry will give a boost in term of operational efficiency and effectiveness[footnoteRef:4]. [3: CBRC, 'The Non-performing Loan of Major Commercial Banks in China' [2009] 3 accessed 19 March 19, 2011] [4: K. Gupta, World Trade Organisation Volume 2: Exceptions to the Agreement (Atlantic Publishers & Dist 2006)]

COMPARISON OF MODES

The comparison of modes is made on the limitation of market access and limitation on the national level between U.S. And China. From the U.S. point-of-view it gives full national treatment to the foreign banks but imposes few trade barriers. This hinders the foreign banks business strategy who is planning to expand their size and market access. The financial regulation system also is not welcoming for the foreign banks and imposes various severe controls on the openness and business operations of the foreign banks[footnoteRef:5]. [5: H. Horn, The WTO case law of 2001: U.S. -- Export Restrains (Cambridge University Press 2003)]

On the other hand, china has more concentrated on the limitation of the appearance but in actually they are fewer in fact. For the stability and development of the financial system the opening up of the banks is adhered to the proper sequential process. When taken the consideration of geographic, the setting up regions is from developed area to less developed area[footnoteRef:6]. When taken the consideration of business affairs, the openness is from foreign currency business to local currency business. Administrative approval system, qualification research, licensing quantity limitations and operation regulation have also been considered for the evaluation of mode of openness and its frequency. Nevertheless, foreign banks have been assisted with sub-national treatment in terms of income tax, business coverage, loan income and pre-tax debt cancel. For example when taken the consideration on income tax, the tax rate for foreign exchange earnings is only 15% for the foreign banks as compared to the domestic tax rate of 33% for the local banks [footnoteRef:7]. [6: WTO Appellate Body Secretariat, WTO Appellate Body repertory of reports and awards 1995-2005: Retroactive Application of Trade Measures (Cambridge University Press 2006)] [7: P. Mavroidis and P. Messerlin and J. Wauters, The law and economics of contingent protection in the WTO: The Regulation of safeguards in the WTO (Edward Elgar Publishing 2008)]

COMPARISON OF RESULTS

Before 2002, 62 countries had set up their banks in United States with 246 branches of foreign banks, 54 bank sub-agencies, 78 foreign bank holding companies and 165 agencies. The total assets of foreign banks in U.S. were $134 billion, which is approx 18.3% of the total assets in the commercial banking system. The statistics were almost unaltered during 2002-2007 meaning the signing of the trade agreement had no such affect on U.S. banking. Stabilized economy facilitates opening up banking, which in turns improves the banking system and promotes internalization. Whereas in China before 2007, research has revealed that there were 20 solely foreign-owned banks with 95 branches with the total asset of foreign banks amounting $153.9 billion that is approx 2.24% of total asset. With respect to market share, foreign banks in China had no incentive but still they attracted major portion of high earning clients due to their superior service quality thus giving high competition to local banks. The results of openness was quiet noticeable in China unlike United States. The big state-regulated banks, start reforming their banking system gradually by adapting to more sophisticated means of company governance. In the grave areas of non-performing loans, a more refined infrastructure similar to that of any modern corporation is adopted. For this reason the ratio of non-performing loans has decreased tremendously[footnoteRef:8]. [8: Ministry of Commerce, American Trade Policy: the Trade Policy Review of the United States (China's Commerce Press 2004)]

After the all-round opening up in 2006, the major domestic commercial banks have to change the mode of relying on deposit and loan business only facing the fierce competition. They pay more attention on the possibility of full-service banks, and tried their best to reduce the risk and bad debt. The figure 3 is the recent year's performance of the major commercial banks in China in the aspect of non-performing loan. In 2006 due to the all-round opening, domestic banks in China changed their mode of operation they began focusing more on full banking service and reducing risk and bad debts[footnoteRef:9]. [9: H. Maochun. International Service Trade: liberalization and rule. (World Economy Press 2007)]