The entrance of foreign players to the Mainland banking sector accelerated internal reform and fostered fierce competition, Sohu New reported.   By the end of this year, the banking sector is bound to be fully opened to foreign banks. All the regulations on foreign financial institutions must be lifted. Increased competition would terminate domestic banks’ monopoly.   Up until October 2005, 173 banks from 40 countries have established 238 representative offices in 23 cities and 71 foreign banks from 20 countries have established 238 operating branches in 23 cities. These banks have assets in the Mainland totaling 845 million US dollars.   Entrance of foreign banks However, the threshold for foreign banks’ entrance to Mainland is still high. They generally need large-scale licensing capital and face complex administrative procedures. The easier way is to buy stakes in Chinese financial institutions. From the recent listings of Bank of Communications and the Industrial and Commercial Bank of China, although foreign shareholders need to invest a large amount of capital at the initial stage, it is also easy for them to generate even greater profit after the listing is completed.   Development of foreign banks Foreign firms have cultivated new methods for investments in China and for generating credit card business, property mortgages, insurance distribution, private banking, financial consultancy and securities, which are among the most popular areas.   Since China’s entrance to the WTO, the number of foreign banks’ branches has grown rapidly and their distribution is strategic. Their branches are mainly located in Yangtze delta region, Zhujiang delta region and the Bohai economic zone.   Foreign banks’ share of the market has increased rapidly with their share of foreign currency loans reaching 19 percent. In the first quarter of 2005, the foreign banks located in Shanghai had assets that totaled 3423.41 million yuan, various loan balances that totaled 1658.85 million yuan and deposit balances that totaled 893.33 million yuan. With 138.21 million US dollars in total, it was also the first time for foreign banks to have foreign currency loan balance exceeding Chinese banks’.   To meet the yuan business demands, some foreign banks have increased yuan operation funding. In 2005, 14 foreign banks in Shanghai had applied for yuan operating fund capital that totaled 21.48 yuan and had 14.24 million yuan approved, which paved the way for a fully-opened individual banking market.   Lessons from foreign banks For those Chinese banks introducing foreign investment into their structures, foreign participation not only attracts large-scale capital, which solves the difficulties of capital shortage but also helps optimize investor structure, scientific management, and operation systems. As commercial banks, their risk management and opportunity for innovation improve with the introduction of foreign services and operating philosophy.   The introduction of foreign strategic investors can improve monitoring of domestic banks as they are monitored by the international market and foreign investors. Their financial statements would then be done by professional accountants according to international accounting standards. They will also be responsible for middle- and small-sized investors.   Counter-attack Under competitive pressure from foreign banks, domestic banks accelerate internal reform including restructuring of management structures and investments to create an optimized banking system that can compete with well-structured foreign banks.   While competing to retain customers, domestic banks also strive for developing new sources of income such as foreign exchange business. They try to retain their leading position in foreign exchange by relying on their extensive national network and customer base, which offers the only support against the fiercely competitive foreign banks for yuan currency business.   President of China Banking Regulatory Commission, Liu Liu Minghong, said that foreign banks have become an important factor contributing to optimization of Mainland’s banking structure, which is more modernized and also intends to raise the level of services at local banks.   Zhao Xijun, a professor with China Normal Unviersity, added that increased competition can stimulate domestic banking sector to improve its financial services and products offered. Consumers thus have more options.   He Liping, a professor with the school of economics at Beijing Normal University, pointed out that the rapid development of the banking sector reduces domestic banks’ profitability. Since foreign banks particularly those from America and the European Union have obvious competitive advantages, the opening of the banking sector brings an internationalization that is still absent from the capital market.