Letter from Beijing
WTO Is Only the Warm-Up
by Robert Poole
This year will be a landmark year for financial services in China. We can look back at all that China has achieved in the five years since it joined the World Trade Organization (WTO) and look ahead to what the market will look like once China fulfills its final—and most important—WTO commitments in the fields of banking and insurance, which fall due on December 11, 2006. Specifically, China has agreed to lift all geographic and customer restrictions on foreign banks and eliminate any nonprudential measures that restrict the ownership, operation, and operational form of foreign-invested banks. In insurance, China has agreed to allow wholly foreign-owned subsidiaries in insurance of large-scale commercial risks, brokerage for reinsurance, and brokerage for international marine, aviation, and transport insurance and reinsurance.
China's progress to date can be viewed as truly monumental. Consider the number of new laws and regulations, the birth of new regulatory agencies, and the steady increase of licenses, investments, and staff. Visitors to Chinese bank branches in major cities will notice orderly lines and crisply packaged offerings of new saving and investment products. Insurance and risk management products are slowly but steadily being introduced. Securities companies, although still reeling from four years of heavy losses, have built retail networks in preparation for the advent of proper markets.
The slow pace of reform
Any discussion of financial services in China remains principally centered around reforms, and their pace. Though 2006 may stand out as an especially important year for China's financial sector, it will take many years for the full benefits of market reforms to reach Chinese enterprises and consumers, the ultimate beneficiaries of financial reform.
The pace of China's reforms cannot be as fast as most observers would like. The need to create or reconcile a large body of regulations is most frequently cited as the main reason for the slow pace of change, but equally important is the fact that financial services is a knowledge-based business. The creation of a national market of educated financial consumers in China—and experienced bankers, stockbrokers, and insurance agents to serve them—will inevitably take years. Nevertheless, Chinese consumers and companies are hungry for knowledge and quick to learn, and the pace of learning and change will accelerate every year.
"Financial services" is an umbrella term used comfortably in America that encompasses different industries, each with subsets of products and services, each requiring regulations, prudential supervision, education and training, and introduction to end users. In China, however, the relative newness of these industries has resulted in a vast body of implementing rules, regulations, and laws administered by agencies with authorities that sometimes overlap and that certainly have not yet coalesced as a "financial services industry." Any examination beyond surface depth quickly reveals that there are no easy fixes or ready ways for China's financial markets to be "opened."
As a result, it is easy to sense mutual distrust and suspicion in Beijing. PRC regulators fear that American companies will dominate service sectors because of their advanced management, superior information systems, and access to capital, while foreign players worry that PRC regulators will allow reform and opening measures only when they have the means to protect domestic companies from foreign competition. There may be some grounds for both of these fears. China's financial regulators are walking an uncomfortably fine line, trying to balance the need for reform and opening with the need for stable domestic markets. Of course, the ultimate goal for both PRC regulators and foreign industry is to create Chinese markets that function as transparently and efficiently as major world markets. However, China also considers the creation of strong, internationally competitive domestic financial services companies equally important. At the same time, China's fear of domination by American financial institutions appears misplaced; self-imposed risk limits and prudent growth strategies will prevent them from attaining outsized market shares.
The fundamental question of opening financial markets remains contentious in some circles in China, and PRC regulators rightly observe that US markets sometimes have problems—the savings and loan crisis, the dotcom bubble, and the exposures of asbestos liability or tort claims are all examples they can cite. But the US system enables us to weather those crises and to rely upon markets and prudential supervision to make improvements. One day, the same will be true in China.
In the long run, embracing international financial institutions and systems (likely with some Chinese characteristics) will greatly benefit China's consumers and companies by introducing better financial products, efficient markets, and educated practitioners. Chinese financial institutions will also benefit—competition will make them stronger, not weaker. Though China's regulators on occasion may slip into a protectionist frame of mind while trying to build a mature, market-based system, such protectionism will ultimately prolong the weaknesses in the system.
China's financial system reform will be difficult and will require years of effort—the WTO commitments due this year are just a warm-up.
Beyond WTO
In Beijing, the arrival of December 11, 2006 and the fulfillment of China's WTO commitments in this area will be an important milestone, and China has much work to do before then. But the talk among western financial companies in Beijing is less of WTO and more of the many implementing rules and regulations that will need to be rectified or removed to allow truly open markets. Foreign companies are already looking beyond the commitments due in December. Though China should honor its commitments, a narrow focus on the "letter" of China's WTO commitments in these sectors risks overlooking the equally important "spirit" of the WTO—allowing free, fair, and transparent competition among companies regardless of national origin or ownership. How readily, and to what extent, China's financial regulators adopt this "spirit" will be vital in determining the speed at which China's financial markets and institutions will mature and integrate with the world financial system.
China's financial system reform will be difficult and will require years of effort—the WTO commitments due this year are just a warm-up. The American financial companies that understand China best are well prepared to act as partners in this tremendous endeavor, on which much of the country's economic future depends.
Robert Poole is vice president, China Operations, at the US-China Business Council in Beijing.
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