Gears turn slowly for banks in China

Scott Tong Dec 11, 2006

KAI RYSSDAL: Bankers are used to big numbers. But even for them $4 trillion is a lot of money. That’s about the size of the retail banking jackpot waiting in China. The world’s biggest financial services companies have spent billions of dollars to get just a toe-hold in it. Because when China joined the World Trade Organization five years ago today, Beijing agreed to open its banking industry to foreign competition. But Marketplace’s Scott Tong reports from Washington, they didn’t exactly open it wide.

SCOTT TONG: When China negotiated its way into the World Trade Organization, Charlene Barshefsky sat at the other end the table—as President Clinton’s trade representative.

CHARLENE BARSHEFSKY:China agreed that foreign financial institutions would be able to do business in China without restriction.

Without restriction. As in, bring in the western banks, and their ATMs and credit card teaser rates, right? Not any time soon. Officials in Beijing have issued new rules that only allow competition in a quote “orderly and partial” way. Barshefky thinks those rules may violate the WTO deal—they make it very pricey for foreign banks to play in China.

BARSHEFSKY: China will require that each branch that is set up be subject to a minimum requirement of 50 million dollars or 70 million dollars or a hundred million dollars per branch. This is a lot of money.

The foreign banks will also have to set minimum deposit levels so high that only the super-duper rich in China will qualify. So the masses will be left with the state-owned banks controlled by the party. Banks that, to some, still operate in the Jurassic age of financial services.

MINXIN PEI: Credit card services, consumer loans, Chinese banks do an awful job.

Minxin Pei is with the Carnegie Endowment for International Peace.

PEI: They don’t know how to do risk management, they don’t know how to pick the best customers. So American banks will have enormous advantages over Chinese banks.

He thinks western banks will crush the local competition—if and when they actually get to compete. Today’s rules make that so difficult that Citibank and Bank of America et al settle for indirect entry—investing as minority partners in the state-owned banks.

When China’s critics look at all this, they offer up a not-so-flattering metaphor. They say China has taken the machinery of the free market, and thrown sand in the gears.

[sound of gears]

Wrenching, grinding, inefficient.

Not surprisingly, China’s defenders pick a more peaceful image:

[sound of a stream]

A stream.

Chinese leaders like to say that moving to a market economy is like crossing a river, one stone at a time. And that makes sense to Georgetown finance professor Jim Angel. He says China has had a tumultuous history of making economic changes too quickly.

JIM ANGEL:They started off the 20th century as a feudal economy, and very quickly tried to adopt to a market economy. And then the communists came in and attempted a Marxist economy. And the result was an economic disaster.

He says those lessons make Beijing particularly nervous about outside competition—particularly in banking. Here’s their horror scenario: Imagine foreign banks enter China and dominate. And then there’s a rerun of the 1997 Asian currency crisis. Investors panic, stick all their money in the foreign banks and pull everything out of the Chinese banks. That could ruin the Chinese banks—leave them with no cash left to lend.

ANGEL:If the banking system blows up, the entire economy blows up. We saw this happen in the United States in the 1930s, we saw it happen in Russia in the 1990s.

This week U.S. Treasury Secretary Hank Paulson flies to China, in part to pry open the door for western banks. Still, most observers expect a long, slow slog.

So is the red tape worth it? Some 70 international banks think so:They’ve already dipped their toes into the China market—waiting for the day when they can offer a billion customers everything from credit cards to car loans to mutual funds.

In Washington, I’m Scott Tong for Marketplace.

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