Chinese banking industry reform after WTO accession and U.S. comparison

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 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)]

WHAT TO LEARN FROM THE COMPARISON?

Development and growth of banking sector lies on the stability of economy. Financial liberalization is a mode to speed up reforms in banking system. With respect to power and stability, the economy and intensity of banking sector development is higher than that of China. The development of economy is fast paced but should not be solely represented by GDP rather on the stability[footnoteRef:10]. [10: K. Raju, World trade Organization Agreement on Anti-dumping: Fair Comparison Standard (Kluwer Law International 2008)]

The banking regulation of foreign banks is very complex in U.S. both on state and federal level with different regulation institution for different business areas. While in China the governing regulatory bodies are China Banking Regulatory Commission and the People's Bank of China. Government still controls banks' regular operations and the market does not work effectively[footnoteRef:11]. [11: H. Song 'The Infrastructure of Foreign Bank Regulation in the U.S.' [2006] accessed 19 March 19, 2011]

CONCLUSION

With this comparison of setting up the banking industry in U.S. And China, it can be concluded that there exists likeness and disparity among the goals and modes of banking but the final result is the benefit of the whole economic system. China with its still prevailing short comes have shown considerable increase in the efficiency of the banking industry. Government can play a major role in the healthier growth of the banking industry and the positive overall impact on the economic state through its policy and regulatory measures.