Centre for Research on Globalisation
Centre de recherche sur la mondialisation

The Impacts of WTO Entry on China's Banking System

by Guohan Zhu

www.globalresearch.ca   5 November 2003

The URL of this article is: http://globalresearch.ca/articles/ZHU310A.html


The banking system plays the most important role in East Asian economies. Since the 1997 financial crisis and the long period depression in Japan starting from the early 1990s, governments  in East Asian countries have become more and more sensitive to the stability of the local banking system.

Reckless globalization of a fragile banking system always comes with short-run prosperity but with long-run devastating effects. Five years after the East Asian tragedies, China's accession to the World Trade Organization (WTO) integrates China's banking system into the structures of global finance. .

Both positive and negative effects of the reentry to GATT or accession to the WTO have been discussed and analyzed a lot since the late 1980s.

This paper will focus on the effects of accession to the WTO on the banking system of China.

Based on the bilateral agreements with major WTO members and Financial Service Agreement (FSA) with the WTO, China is to open its banking business step by step after the accession to the WTO.

Within five years after entry, all geographical and client restrictions on foreign banking services will be removed. Compared with those obviously foreseeable negative effects on the sensitive industries such as agriculture, automobile and hi-tech industry, the effects of the WTO on banking system of China are still not been explored seriously by the public. However, the negative effects of the opening of the banking system are more devastating to the whole economy.

Being a former employee of a government bank of China, the author of this paper will make an analysis on the present situations of the banking system of China and the effects of the WTO on it based on his own knowledge and experience.

Comments on the FSA schedule and China-U.S. bilateral agreements

From the FSA schemes and agreements (see WTO document WT/ACC/CHN/49/Add.2), we find that

First, foreign banking services can spread all over China quickly in the foreign currency business. In 2001, the portion of foreign trade in total GDP had already reached 35% and total foreign currency banking business had been increasing dramatically since the 1990s. Fierce competition in foreign currency business will soon take place between local and foreign banking organs.

Secondly, it is only seemingly that local currency business will open step by step and only several financial centers will open their local currency business in the first two years. However in China, more than 70% of total banking business takes place in urban regions, especially in those regional financial centers because of a huge regional divergence. Within only 2 years after accession (at the beginning of 2004), most important national or regional financial centers will open banking business in local currency, which means a market of more than 50% of total credit will be open to foreign services.

Thirdly, the geographic restrictions on foreign banking services are very blurry because of the strong radiative function of regional financial centers. The accession to one regional financial center also means the accession to a whole province or several neighbor provinces. For example, the open of Shanghai dose not only mean an open of 5% of GDP, 10% of total exports and 8% of total credit of China. It also means the open of the whole Yangtze delta regions that produces 15% of total GDP and 20% of total credit. Brief estimate shows that regions producing more than 60% of total GDP will open their local currency business to foreign services in only 2 years.

The above arguments show us that, as soon as China accesses to the WTO at the beginning of 2002, the whole banking system will be brought into direct competition against those foreign banks, at least in foreign exchange business. Although some rich regions (Shanghai and Canton) have a long history of withholding foreign banking services, the restrictions used to be hard and foreign services were forbidden from local currency services. After the lifting of those restrictions, are they still able to handle the situation facing the expansion of foreign banks? What is more, for those regions with only a short or no experience of foreign banking services, are two or three years enough for them to get ready for such a big external shock brought to local banking services?

WTO vs. the Banking system of China

The Optimistic group focused on the improvements such as the improvement of service quality of local banks and a more efficient operation mechanism brought by the competition. Needless to say, a larger scale of participation in international competition will make the local banking system more efficient and bring more improvements to it. But, those arguments seem to ignore an important condition, that is, the effectiveness of this strategy depends on the condition that the local banking system should have a strong enough nature to compete against foreign banking services. Without a solid foundation, the rash pace of globalization will only devastate the local banking system.

From the perspective of market share, the "Big Four" state-owned commercial banks (Industrial and Commercial Bank of China, Bank of China, Agriculture Bank of China and China Construction Bank) together with another state-owned share-holding bank, the Bank of Communications (BC), are controlling nearly 75% of the total credit of China by the end of 2002. The analysis of this paper will also focus on the above five banks as a good reflection of the banking system of China. In the 2001 "World 1000" ranking list (presented by The Banker), the above five banks rank the 7th (ICBC), the 18th (BOC), the 21ST (ABC), the 29th (CCB) and the 94th (BC) by tier one capital. Apparently, the majority of the banking system of China is strong enough to compete with those famous foreign banks after the accession to the WTO. But if we explore the stories behind the simple ranking in tier one capital, the appendix Table 1 and Table 2 show us severe problems in local banking system facing strong external competition:

Heavy burdens for state-owned banks- bad asset and personnel expenditure

By June 2003, total asset in the banking organs of China had already reached 1561 billion dollars, in which the "Big Four" and BC covers most portions. Officially, the "Big Four" banks announced their NPAR (Non-performing asset ratio) with an average of 22.19%, which means nearly 17% of total credit in the economy, is non-performing asset.

But some external sources argue that "The top four state-owned commercial banks are estimated to have bad loans equal to 40% of their combined lending." This argument is reasonable if we consider the bad asset transferred to the asset managing organs. In 1999, when the government of China recognized the bad assets of state-owned banks (SOBs) as a devastating problem, four asset managing company was established each with 10 billion Yuan of capital. Right after the establishments, the four companies began to take over or purchase the bad assets from their mother banks, the "Big Four" and the development banks. By the end of 2001, more than 200 billion dollars of bad assets had been transferred to the "New Big Four" companies. Considering this part of assets, total NPAR for the "Big Four" will reach 38%. At the same time, the average NRAR for the other foreign 18 biggest banks ranked in the front 20 of "World 1000" list was only 3.27%. Even for those commercial banks in Southeast Asia before the 1997 Financial Crisis, the average NPAR was only 6% (see Zhong 2002).

The large scale of non-performing assets is closely correlated with the devastating of state-owned enterprises (SOEs) in China. An optimistic estimation shows that only 1/3 of the 100 thousand large & medium scale SOEs in China are making profit (in financial statements) and around 1/3 of them are nearly in bankruptcy. For those new established share-holding commercial banks, the NPAR indicators may look better from their balance sheets, but problems are still foreseeable. They would probably face the same problems of bad asset when their new issued mid-term and long-term loans due in the near future. By June 2003, the NPAR for all three government banks is 18.61%. Among the government banks, the portion of bad loans for the Agriculture Development Bank of China had already reached 35% in 2001, which is probably because of the loans been issued to state-owned foodstuff purchasing and reserving organs which have been definitely losing money all these years (the so called "policy loss"). For China Development Bank, the government bank issuing loans for large national and regional infrastructure projects, the NPAR was around 2.4% in 2002. But it was also the result of a transfer of 20 billion dollars of bad assets. What is more, most of the loans issued by this bank are 12-18 years long-term loans.

Non-performing assets will never make profit for the bank and most part of the principle will be non-collectable. Too many non-performing assets will decrease the liquidity of assets and affect the profitability of the bank severely. Liquidity problems will directly bring on payment crisis. The bankruptcy of Hainan Development Bank of China, because of huge bad loans given for real estate projects in Hainan province, in the early 1990s is a good example.

Another heavy burden is the over-employment. In China, more than 1.5 million people were working for the "Big Four" SOBs by the end of 2001. This heavy employment burden reflects the SOBs’ locating principal of banking business descended from the central planning economy traditions. Most SOBs have their deposition offices even in those poorest rural regions. In those offices, at least 5 people should be employed to carry out banking business although there is almost no business. In urban cities, an excessive amount of branches and offices had also been established within the "deposition war", which broke out among the SOBs in the early 1990s.

If we take 3000 US Dollars as the annual personnel expenditure per capita, the total operation expenditure will be as high as 4.5 billion dollars for the "Big Four". At the same time, their per capita profit indicators are much lower than those of foreign banks (see Table 1 and 2). In those SOBs, the Agriculture Bank of China had the largest employee, 500 thousand people, by the end of 2001. The per capita profit of this bank was only 72 dollars in 2001. But for the most profitable bank in Table 2, Citibank, this indicator was 91,926 dollars, which was 1500 times higher.

Business loss because of functional deficiencies -the Nanjing Ericsson shock

With the explosive expansion of foreign banking business, a large amount of business conducted by local banks will definitely transfer to foreign banking services after the accession to the WTO. The loss of business will not only because of better global reputations of foreign banks. More importantly, foreign banks can offer diversified services to the firms. A foreign bank can be called as the "financial department store", if we call a local bank a "specialized store". The competition condition between local and foreign banks is obviously unequal form the very beginning in that foreign banks can offer almost all financial services including security and consulting, which are still new issues for local banks. What is more, the income tax rate was still 33% for the heavily burdened SOBs in 2001, when foreign banks pay only 15%. Foreign banks will also enjoy a tax holiday in their first profitable year and pay only 7.5% in the second year. Although local banks still have a chance to march into those new business, they would be very inactive in the long run because good clients would have been snatched up. One famous case, the "Nanjing Ericsson shock", had already happened in 2001, on the eve before China’s accession to the WTO.

Nanjing Ericsson is the largest Sino-foreign joint venture in Nanjing, the capital of Jiangsu province. In 2001, the total income of this company was 1.5 billion dollars and net profit was as high as 100 million dollars. As well, in 2001, this company paid off all its loans (about 250 million dollars) from the "Big Four" banks with the funds offered by HSBC and Standard Charted Bank Shanghai branch. The trigger of this shock is that the local currency business of foreign banks located in Shanghai had just been approved to operate in its neighboring provinces Jiangsu and Zhejiang. The reason of the credit transfer is very simple. Foreign banking services offered a lower interest rate (a 5% discount based on the official interest rate) on their foreign currency loans and agreed to provide non-reimbursable guarantees on all the receivable accounts of Nanjing Ericsson.

Foreign banks are big winners in this campaign. Most of the receivable accounts in Nanjing Ericsson are caused by the installment policy when the company sells its equipment to telecommunication companies nationwide. The foreign banks will not bear any risk in the non-reimbursable guarantee services. Although local banks have a better condition to offer this service because of their numerous branches all over the country, they lost in this campaign because the non-reimbursable guarantee service had not been approved by the central bank. Furthermore, a good client was lost.

By June 2002, total local currency asset of foreign banks in Shanghai had already multifolded to 4 billion dollars since the restriction was lifted in 2000 and since China’s accession to the WTO. The speed of credit loss has been dramatic and total market share of foreign banks in Shanghai has already reached 4%. The quick pace of credit transfer does not only mean much revenue from loans and intermediate business would be lost; It also goes with the loss of a large amount of cash inflow, because the primary transaction account of clients will be transferred to foreign banks. As we know, the most important factors in banking business are the profitability in operations and liquidity of assets. Large-scale credit transfers will be devastating to both factors. What is more, if the local banks are unable to obtain new cash inflow, the lack of payment reserve will soon bring payment crisis to them.

Poor Capital Sufficient Rates and weak profitability

The Capital Sufficient Rate (CSR) is the tier one capital divided by the weighted risk assets of a bank. Due to the high NPARs of the SOBs, the CSR indicators for the "Big Four" are still very low (4.75% for ICBC, 8.50% for BOC, 1.44% for ABC, 3.79% for CCB) in 2001. But the average CSR indicator for the biggest six banks in the Banker "World 1000" list had already reached 11.53% in 2000 (see Zhong 2002). Lower CRS together with higher NPAR shows that the payment ability and the liquidity of assets in the SOBs are very limited. Once again, if the SOBs can not absorb enough cash inflow to cover this problem, payment crisis would show up in the economy.

These poor CSR indicators will be even worse without the urgent injection of 20 billion dollars of tier one capital by the Ministry of Finance of China (MFC) after the East Asian financial crisis in 1997. What is more, if we explore the balance sheets of those SOBs, we find that the CRS indicators could be only called as "nominal" CRS for many of them. The real CRS indicators should be much lower, in that part of the capital was still a number recorded in the "Capital Receivable" account, which means dud checks had been issued as part of capital when the SOBs were established.

Profitability is another bottleneck for any of the SOBs. The comparison between Table 1 and Table 2 (see appendix) shows us the extremely low profitability of the SOBs. The highest capital-profit ratio and asset-profit ratio was only 7.39% and 0.34% in 2001. At the same time those two indicators for Citibank was as high as 38.8% and 2.34%.

Low profitability is also a reflection of the poor condition of the SOEs in China, Many loans in the boom of commercial banking business in the early 1990s had been given to the SOEs and soon turned to bad assets. Official devaluation of local currency, the policy of "Investment changing into loans" and the lifting of restrictions on the raw material prices in the 1990s had pushed the average asset- liability rate of the SOEs up to 70% in 2001 (3 times higher than the level in the 1980s). The huge financial cost burden for the SOEs is one of the major factors made them begin to lose money and many of them go bankruptcy. The comparison, the loans given to those foreign invested joint ventures including Nanjing-Ericsson are better quality assets and constituted a major profit resource for the SOBs. After the accession to the WTO, with the transfer of joint venture business to foreign services, much of their profitable resource would be lost, which will further devastate the future profitability of the SOBs.

The loss of elite employees –the policy of "Yi hua zhi hua"

Since the "Opium Wars" broke out in 1848 and the subsequent hash inflow of Western business into China, the Western powers had been famous for the policy of "Yi hua zhi hua", which means using Chinese people to control China. This policy has begun to take effect again since the "Open and Reform" policy was carried out in the late 1970s. Due to the special culture and "petticoat influence" prevailing in most East Asian countries, human resource, the so-called "interpersonal relationship" is very important in the banking business of China. Most banking business in a branch or office of the local banks depends on only one or two senior managers.

Since the late 1970s, thousands of business elite of local banks have been captured by foreign banks because of a higher payment and better working condition. In one of the "Big Four" banks, the chief office in Beijing recruited nearly a dozen of graduate students in the last three years. But now, only two or three people still stay in the bank. Half of the lost elite had gone to foreign banks and insurance companies.

Generally speaking, the payment offered by foreign banks such as HSBC in local market is 5 times higher than that by local banks. At the same time, local SOBs are still unable to fight back because of an old style paying mechanism as well as an unfair welfare system for elite and young employees. The loss of one senior project manager always go with a loss of millions or tens of millions dollars of good assets and cash inflow. It is most important that the bank will lose the proxy for a large amount of good clients and the future ability to make profit form those clients.

The above cases only happened in Beijing, the capital of China with nearly 100 foreign financial organs located. After the accession to the WTO, this shock will soon unavoidably affect local banks in all regions.

Foreseeable effects on the economy

Based on the analysis in section three, we can see that upon the accession to the WTO, the banking system of China is just like an "Old baby" because of the heavy burdens, poor profitability, low CSRs, functional deficiencies and the loss of business elite. All the above problems directly bring on payment crisis in the local banking system. Facing the fierce competition created by foreign banks, the results of harshly globalization of the banking system would be devastating to local banks and would further damage the whole economy.

Actually, bad assets will never be devastating to local banks in a comparatively closed financial system. Several years before China’s accession to the WTO, the SOBs, the central bank and the government of China had already realized problems such as over employment, high NPARs and low CSRs. Efforts had been made to solve these problems. Extra offices and employees had been cut off, more tier one capital had been injected as cash, bad assets had been transferred and the asset managing organs had begun to pack those bad assets and sell them to private sectors and stock markets. At the same time, with the strong and stable growth of the national economy, local banks were very "rich in position", that is, cash inflow surplus cash outflow a lot. The steady growth of cash inflow would offer local banks precious time to finally dissolve those bad assets and improve their CSRs to a satisfactory level using their operation profit.

Entry to the WTO, however, would probably cause a setback to the local banks on their ways of improving –the loss of cash inflow. Local banks would be deprived of new funding resources to cover the problem of non-performing assets and, finally, lose a reasonable phase-in period to make adjustments. Although the SOBs in China can be called "Aircraft Carrier" even in the world market, low liquidity in the assets and the loss of cash inflow would probably bring them into payment crisis in a near future. In China, a payment crisis in even one branch of one single SOB will devastate the confidence of the whole society in the SOBs. What is more, payment crisis would definitely trigger financial crisis, which has already devastated so many emerging economies in East Asia Latin America, and would affect or probably devastate the whole economy of China.

A further damage to the SOEs

Payment crisis and the subsequent deregulation of financial markets will hurt local SOEs directly. Interest rates would soar during the payment crisis and financial crisis. "Concessional credit to agriculture and industry is phased out; the commercial banks are no longer in a position to provide credit to the real economy at reasonable rates. This policy, together with the phase out of the state development banks –leads to the collapse of credit to both agriculture and domestic industry" (see Chossudovsky 1991). Case studies show us that interest rates would definitely soar in all countries during payment and financial crisis (more than 35% in 1994 in Vietnam, 23% in 1997 in Thailand, 160% in 1999 in Ecuador, 2300% in 2001 in Turkey).

As we know, the SOEs in China have been enjoying low interest rate loans from both development banks and state-owned commercial banks. As well, the central bank cut down interest rate level three times in 2000 to relieve the financial burden of the SOEs. Currently, the average loan rate in the economy is only around 5%. If the above situations happened in China, it would cut off new funding resources at a reasonable rate for the SOEs. The expansion of production in the SOEs would be phased out.

As mentioned before, the average asset liability rate was already 70% for the SOEs in the late 1990s. The soaring interest rates would also take effect on the old loans and multifold the financial cost for the SOEs.

Devastation of the agriculture industry

Chinese peasants have already been caught in the following cycle year after year: get loans from the SOBs, buy seeds, fertilizer and pesticides, sell their harvests and pay back loans and interest. At the end of the cycle, most peasants are only left with some grain that enough to feed them, as well as very limited cash revenue. The loan rate offered to agriculture industry is much lower even than that offered to the SOEs.

The soaring of interest rates would definitely devastate the whole agriculture industry. If peasants continue to use loans, a large part of their own food resources will be used to pay the extra interest. But if they don’t use loans, they will not be able to continue their production. As mentioned before, the agriculture industry of China will be a big loser in the WTO game started in 2002. Price levels of agricultural products will decrease because of the maxi import of agriculture products. On one hand, the prices for agricultural products are decreasing. On the other hand, the financial costs of planting are rising. The peasants will never make money from their limited arable lands and more planting means more loss. The problem is not only that the peasants will be impoverished; famine, which extinct in China since the 1960s, would probably show up again.

Foreign debt will increase dramatically

By June 2002, the total foreign debt of China was 169.1 billion dollars. The major borrowers are the government (34%), foreign invested firms including foreign financial organs (35%) and local financial organs (24%).

The expansion of foreign banking services will offer local firms a convenient way to accumulate foreign debts. A large amount of credit would transfer from local banks to the branches of foreign banks in China. If only 20% of total credit (1624 billion dollars in 2001) transfers to foreign banks, the total foreign debt of China would be 2 time higher and would be one time higher than the foreign exchange reserve of the economy (240 billion dollars by June, 2003). Also, much foreign debt would be brought forward through the fund borrowed by foreign bank branches in China to expand their business.

Besides those obviously foreseeable ways of increasing foreign debts, bailout loans would probably have been borrowed by the government to save the devastated local industries including the SOEs and the agriculture system. The SOBs, which used to be a good instrument for the government to mobilize internal resources, will unable to offer their aid again because they themselves would be in crisis at that moment.

Income Disparities will increase

Statistics shows that the income divergence between poor and rich people in China had been increasing throughout the 1990s. Being called as "the world factory" with an average growth rate of 9.3% since 1978, China has already been in deflation for a long period. Total demand is weak and there are overproductions in most industries. While, the total private savings in the economy had been increasing at a speed of 10% since 1990 and reached 1000 billion dollars by the end of 2001. However, the increase of social prosperity can not effectively boost total demand.

The reason for this situation is very simple: only a small portion of the population controls the majority of social prosperity. Estimate showed that in 1992, 80% of total savings were controlled by 20% of the population. But in 1997, this number became 90% by 10%. A limited number of rich people have already had everything they can reach and imagine. They don’t have to spend their money in some consumption products, including housing and private transportation. But for the majority of Chinese people, there is much hunger for funds to reach the basic living criteria or even feed themselves. A good example is that the per capita accommodation area was as low as 12 square meters in 2001. While there were billions of square meters’ vacant apartment for sale because the price was far beyond reach for most people. With the collapse of local SOEs and agriculture industry, most people will be impoverished further and there would be a stronger propensity that a smaller portion of people control more social prosperity. The huge income divergence would be a root of numerous social problems.

After the study of the cases and lessons of some other developing economies of East Asia and Latin America, I began to think about the situations of local banking system after the accession to the WTO and realized that tragedies would happen in China. Payment crisis, collapse of local industries, high unemployment rate, impoverished people, enlarged income divergence and a possible famine, all these factors would cause all kinds of social disturbances in China.

The implications of social disturbances in China would go further than that a single developing economy be ruined. It would affect 1/6 of total population on the earth. The "Open and Reform" policy carried out by the government since the late 1970s did contribute to the economy and improve living conditions of most Chinese people. But just as a famous Chinese saying "too much means nothing", a hash and reckless globalization would cause devastating negative effects to local economy and possibly ruin all the fruits achieved by the Chinese people through their hard working in the past twenty years.


Table 1. Important indicators of the SOBs of China (31 Dec., 2001)






Balance of Asset Account (Million U.S.Dollars)






Tier One Capital (Million U.S.Dollars)






Pre-tax Profit (Million U.S.Dollars)










































Capital Sufficient Rate (CSR)






Non-performing Asset Ratio(NPAR)






Rank in World 1000






Note: 1. The sources for all the indicators except Capital Sufficient Rate and Non-performing Asset Ratio are "World 1000" listing presented by the Banker. The financial reports of five banks are also studied. 2. The total employee number of the Agriculture Bank of China is approximated and is collected from the web site of ABC. 3. The Capital Sufficient Ratio indicators are collected from the Economists (Jul. 2001). 4. All the data presented in RMB has been changed into U.S.Dollars at a par value of 8.3.


Table 2. Important indicators of major foreign banks in operation in China (31 Dec., 2001)


Bank of America


Deutsche Bank

Bank of Tokyo-Mitsubishi

Sakura Bank

Sumitomo Bank

the Balance of Asset Account (Million U.S.Dollars)








Tier One Capital (Million U.S.Dollars)








Pre-tax Profit (Million U.S.Dollars)
























































Non-performing Asset Ratio(NPAR)




Rank in World 1000










Chossudovsky M. 1991 The Globalization of Poverty and the New World Order

Zhong, W. 2002 "State-owned Banks: Live or Die?" {http://business.sohu.com}

HKGCC. 2001 "HKGCC WTO Report" {www.hkgcc.org.hk}

Working Party on the Accession of China. 2001 "Report of the Working Party on the Accession of China" WTO document (WT/ACC/ CHN/49/Add.2 Oct)

"The Ericsson Shocks" The People’s Daily (Overseas Edition) 5, Apr., 2002

 © Copyright Guohan Zhu 2003  For fair use only/ pour usage équitable seulement .