Can Chinese Banks Compete After Accession to WTO?

China entered into the WTO in 2001. While critics were howling that the entry of China will collapse the world trading system and all that nice jazz, the impact has been much more muted. Mainly because China's low cost manufacturing led export strategy and large commodity import strategy meant that the large trading partners ranging from Australia, Japan, EU, USA etc. were able to navigate this bump with minimal distress. Plus most of the partners were already doing much business with China anyway.

That said, it also opened up Chinese to international competition and given the dicey situation of the Chinese banks, that gave rise to the biggest concern.

Here comes a research paper which talks about whether Chinese banks can compete after the accession to WTO. The authors say no, but I am not so sure. If you look at say India, Indonesia, South Korea or any other similarly located or similar sized/shaped banking structure country, they have managed to go for WTO accession without screwing up their domestic banking industries.

I have supervised several Chinese students who have researched on this area as well as couple of students who looked at comparative performance of banks post WTO accession and found that the government will be highly protectionist and careful of its domestic banking sector.

If nothing else, the foreign banks will tread very very carefully in managing their market entry into China and the last thing they want is unrestricted competition which knocks the domestic banks off course.

All this to be taken with a grain of piquant salt!!

Technorati Tags: Banking , China , WTO

 

Xu, L., & Lin, C.-T., Can Chinese Banks Compete After Accession to WTO?, Journal of Asian Economics (2007),
doi:10.1016/j.asieco.2007.09.001

Abstract
Our answer is no, not at least without fundamental changes on the roles of Chinese banks and on the current unfavourable bank regulations towards domestic banks. As a result of China’s accession to World Trade Organization (WTO), foreign banks could compete directly with Chinese banks with little barriers from December 2006. We argue that foreign banks’ expertise and experience in modern banking activities coupled with their interests and regulatory advantages in the traditional Renminbi (RMB) business will lead to a loss of RMB deposits and loans from local banks. Given that Chinese banks are currently ridden with large nonperforming loans and low capital adequacy, the foreign bank entry will exert further pressure on the banks’ profitability and solvency. It is likely that the health of Chinese banks will deteriorate
further in the post-WTO era.