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Less than a month from now, China's banking market will be fully opened to foreign players. According to the agreement concerning China's entry to the World Trade Organization (WTO), overseas banks should be given national treatment from December 11, 2006 five years after China obtained its WTO membership.

 

The opening of the banking sector will largely indicate the end of the transition period for China as a new WTO member.

 

Over the past five years, China has maintained a good record in honoring its WTO promises.

 

The newly published set of regulations on the operation of overseas banks in China, whose content is consistent with its commitments, also bears testimony to that.

 

However, the requirement that foreign banks must operate as a locally incorporated company to be able to offer a full range of services has raised doubts among some market players.

 

The doubts have led to questions as to whether China will violate its commitment. Legal documents for China's WTO entry have also been scrutinized.

 

But the answer is no.

 

It is understandable that an unqualified laissez-faire approach is the most desirable for market players.

 

For the regulators, however, risks that could emerge with the opening of the banking sector must be circumvented as much as possible to protect local depositors' interests.

 

This is exactly the reason for the Chinese regulators' decision to encourage foreign banks to operate in China as a locally registered company instead of as a mere branch.

 

An international bank's financial troubles could have a direct impact on all its branches, including overseas ones.

 

However, regulators of a bank's overseas markets can do nothing to prevent small depositors who have money saved in its branches from being hurt if the bank has set up in that overseas market as a branch. Even the local deposit insurance system cannot offer help because these branches are generally not eligible to join the local deposit insurance system.

 

And that is why the WTO allows its members to follow the principle of prudential supervision to safeguard their financial systems and the funds of depositors.

 

Many countries follow the same practice. After all, regulators' concerns are similar, especially in the era of globalization.

 

(China Daily November 17, 2006)