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Enhancing East Asian Economic Integration: Strategic Issues, Critical Imperatives

This study examines the opening of China's banking sector to foreign competition and the participation of foreign banks through organic growth and equity investments. It provides an overview of East Asian foreign-funded and joint venture banks in China, their market shares, and their contributions to East Asian economic integration.

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Enhancing East Asian Economic Integration: Strategic Issues, Critical Imperatives

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  1. Enhancing East Asian Economic Integration: Strategic Issues, Critical Imperatives----China will fully open up its banking sector to foreign competition after December 11, 2006 Zhou Qing People’s Bank of China, 3 December 2006 Hilton Kuala Lumpur, Malaysia

  2. Part 1: Survey of East Asian Foreign-funded & Joint Venture Banks In China Part 2: Market Shares of Foreign Banks In China Part 3: Banking Sector Opening Under WTO Commitments

  3. Basic IntroductionPart 1 Survey of East Asian Foreign-funded & Joint Venture Banks In China

  4. Foreign banks participate in China’a banking sector through 2 channels: One is organic growth based on wholly owned or majority-controlled operations. Another is equity investment in domestic banks.

  5. 1.Foreign-funded & Joint Venture Banks At end-September 2006, total amount is 15 . Among them : --International Bank of Ningbo (Indonesia), registry time 1993.06 --Allied Commercial Bank (Philippines), registry time 1993.07 --Business Development Bank Ltd. (Thailand), registry time 1995.06

  6. Share(%) of east Asian of the total amount in China (20% at the end of September 2006)

  7. 2.Branches of Foreign Banks • At end-September 2006, total amount is 178. • Among them: --United Overseas Bank Ltd. Xiamen Branch (Singapore) , registry time 1985.09 --Overseas-Chinese Banking Corporation Shanghai or Xiamen Branch (Singapore), registry time 1991.01 or 1991.05

  8. Continued --Bangkok Bank Ltd. Shantou Branch (Thailand), registry time 1992.03 --Yamaguchi Bank Qingdao Branch (Japan), registry time 1992.10 --Overseas Chinese Banking Corporation Tianjin Branch (Singapore), registry time 1993.06 --United Overseas Bank Ltd. Guangzhou Branch (Singapore), registry time 1993.11

  9. Continued --Korea Exchange Bank Tianjin Branch (Korea), registry time 1993.12 --Cho Hung Bank Tianjin Branch (Korea), registry time 1994.08 -- Korea Exchange Bank Dalian Branch (Korea), registry time 1994.11 --The Development Bank of Singapore Shanghai Branch, registry time 1994.12

  10. Continued --Yamaguchi Bank Dalian Branch (Japan), registry time 1995.07 --The Korea Development Bank Shanghai Branch,registry time 1995.12 --Korea Exchange Bank Beijing Branch, registry time 1996.07 --Krung Thai Bank Kunming Branch (Thailand),registry time 1996.07

  11. Continued --Kasikorn Bank Public Company Limited Shenzhen Branch (Thailand), registry time 1996.08 --Overseas Chinese Banking Corporation Chengdu Branch (Singapore), registry time 1996.08 --Bangkok Bank Xiamen Branch (Thailand), registry time 1997.06 --Industrial Bank of Korea Tianjin Branch, registry time 1997.07

  12. Continued --Development Bank of Singapore Beijing Branch,registry time 1997.08 --United overseas bank Shanghai Branch (Singapore), registry time 1998.07 --Hanwit Bank, Shanghai Branch (Korea), registry time 1999.01 --Overseas Union Bank Ltd. Shanghai Branch (Singapore), registry time 1999.08

  13. Continued --Maybank Shanghai Branch (Malaysia), registry time 2000.07 --Hana Bank Shanghai Branch (Korea), registry time 2000.08 --Metropolitan Bank & Trust Company Shanghai Branch (Philippines), registry time 2001.03 --Sumitomo Mitsui Banking Corporation Shanghai Branch (Japan), registry time 2001.04

  14. Continued --Sumitomo Mitsui Banking Corporation Guangzhou Branch (Japan), registry time 2001.04 --Sumitomo Mitsui Banking Corporation Tianjin Branch (Japan), registry time 2001.04 --Sumitomo Mitsui Banking Corporation Suzhou Branch (Japan), registry time 2001.04 --United Overseas Bank Ltd. Beijing Branch (Singapore), registry time 2002.04

  15. Continued --Mizubo Corporate Bank Ltd. Shanghai Branch (Japan), registry time 2002.05 --Mizubo Corporate Bank Ltd. Dalian Branch (Japan), registry time 2002.05 --Mizubo Corporate Bank Ltd. Beijing Branch (Japan), registry time 2002.05 --Mizubo Corporate Bank Ltd. Shenzhen Branch (Japan), registry time 2002.05

  16. Continued --Industrial Bank of Korea Qindao Branch, registry time 2003.05 --Woori Bank Beijing Branch (Korea), registry time 2003.06 --Korea Exchange Bank Shanghai Branch , registry time 2003.08 --Shiuhan Bank Shanghai Branch (Korea), registry time 2003.08

  17. Continued --Sumitomo Mitsui Banking Corporation Hangzhou Branch (Japan), registry time 2004.12 --The Sumitomo Trust and Banking Company, Limited Shanghai Branch (Japan), registry time 2005.03 --The Korea Development Bank Guangzhou Branch (Japan), registry time 2005.06 --Industrial Bank of Korea ShenYang Branch, registry time 2005.06

  18. Continued --Woori Bank ShenZhen Branch (Korea), registry time 2005.06 -- Shiuhan Bank Qingdao Branch (Korea), registry time 2005.08 --The Bank of Tokyo-Mitsubishi UFJ,Ltd (Japan) Tianjin、ShenZhen、DaLian、Beijing 、Shanghai Branch, registry time 2006.03

  19. Continued --Industrial Bank of Korea Yantai Branch, registry time 2006.07 --Mizuho Corporate Bank, Ltd. Wuxi Branch (Japan), registry time 2006.05

  20. Share(%) of east Asian of the total amount in China (33.6% at the end of September 2006)

  21. Basic IntroductionPart 2 Market Shares of Foreign Banks In China

  22. At end-October 2006, Domestic banking: 3 Policy Banks, 4 State-owned Commercial Banks, 12 Joint Stock Commercial Banks, 116 Urban Commercial Banks, 88 Rural Commercial Banks.

  23. Not allowed to take retail deposits in local currency before Dec. 11, 2006.

  24. Because of their still small share (below 2% by assets), foreign banks’ local operations will not present major challenges to Chinese banks nor cause material liquidity concerns in the near future.

  25. At the same time, CBRC (China Banking Regulatory Commission) published a new regulation-Regulations of the People’s Republic of China on Administration of Foreign Banks-This new regulation will govern the licensing and operations of foreign banks in China. The new law encourages local incorporation of foreign banks.

  26. Basic IntroductionPart 3 Banking Sector Opening Under WTO Commitments

  27. A Gradual Process ☆Under WTO accession commitment made in 2001, China will fully open up its banking sector to foreign competition after December 11, 2006. ☆ Having gradually relaxed constraints over the past five years, China will allow foreign banks access to its RMB retail business and lift all geographic and client constraints on their operations, eliminating any existing non-prudential measures restricting ownership, operations, internal branching and licenses.

  28. Continued ☆ The opening process will create a “win-win” result for both domestic and foreign banks. The existence of foreign competition has pressured domestic banks to restructure and transform their operations, evidenced by recently accelerated bank recapitalization and IPOs.

  29. Continued ☆ Foreign investment into the domestic banks also brings in technical assistance and modern banking practices. ☆ Meanwhile, foreign banks will gain market access to China’s rapidly growing banking business.

  30. As of June 30, 2006, there were 71 foreign banks with 183 branches and 14 locally incorporated subsidiaries with local operations in China. Their annual branch openings are at between five and ten per year since 2001. The number did accelerate moderately to more than fifteen per year during 2005 and 2006 in anticipation of the Dec. 11 deadline.

  31. Most foreign bank branches are on the east coast. Shanghai alone hosts 55% and 30% of foreign banks operations in China in terms of business and outlets respectively. • Equity investment in China were more than US$19billion in the past few years, The large state-owned banks introduced strategic investors before their IPOs, while more than half of the nationally licensed shareholding banks and a number of the city commercial banks have also taken on strategic investors.

  32. Continued ☆ ☆ Most importantly, the experience of other east Asian WTO members may shed some lights on Chinese banks’ opening up process. The credit fundamentals of most Asian banking sectors benefited significantly from the banking sector opening up to foreign competition in recent years, particularly after the Asian financial crisis.

  33. International input offers new capital and expertise in product design, risk management and corporate governance. • Some Asian countries opened their sectors to enhance domestic competitiveness. Singapore and Malaysia are examples of such cases. Others were forced into action due to domestic banking crises and capital shortages after the Asian Crisis.

  34. Of course, a minority equity interest does not always mean a lack of effective control. • In the case of Shenzhen Development Bank, a US private equity investor (New-bridge Capital) bought 17.8% equity interest, as a single-largest shareholders, but controls more than half of the board seats.

  35. Continued ☆However, the process has been gradual –in some instances it took years before restrictions on foreign banks were largely lifted. ☆So, three-stage opening process Step1:strengthening domestic banks (recapitalization) Step2:Partial opening, limited competition Step3:full opening, full-scale competition

  36. Thank You

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