COMMENTARY
Commentary: One Stone at a Time, RMB Accounts at Foreign Banks
May 3, 2007
Christopher Bjorke, AFP

Lu Lugang of Shanghai achieved a notable first for a Chinese citizen April 23. He opened a renminbi account at a foreign bank, in his case a local Citibank branch, according to the Xinhua news agency.

Where the occasion ranked among the momentous events of Mr. Lu's life the report did not say. But for the Chinese financial system, it was a cautious step in an important process toward opening its banking system.

China committed to deregulation and increased foreign competition in its banking industry when it joined the World Trade Organization in 2001, and this process has proceeded in stages over the past six years. Foreign banks have been restricted in where they can operate and what kinds of services they can provide-and until last month they were not allowed to offer local customers accounts in local currency.

Along with Citibank, Standard Chartered Bank, HSBC and Bank of East Asia became the first to take advantage of the new rules, which stipulate that banks can only offer the new accounts through locally incorporated subsidiaries. The banks will not fully jump into a market that typically saves 40-50% of its income right away; most will tailor their balance requirements toward wealthier clients.

"The launch of RMB business to local residents is a historical new chapter for Standard Chartered, a bank with 150 years of uninterrupted operation in China," was the optimistic assessment by Katherine Tsang, CEO and executive director of Standard Chartered Bank (China) in a press release.

However, as with many things in China, the new rules are just one step in a long journey.

More Progress Needed

"While most would agree that the Chinese have lived up the strict letter of their agreements-at least as interpreted by the Chinese-I think the general consensus is that in many cases they have not lived up to the spirit of the agreement," said researcher John Dearie of the Washington-based Financial Services Forum.

There is a recognition in China that to continue its growth and develop a domestic market to complement its export-driven economy it needs a modern financial services industry. But it is also clear that the Chinese financial sector as it is now-still struggling with the legacy a command economy based on loans to inefficient state-owned companies-is still a long way from being able to deliver.

This point is not lost on the Chinese leadership, Dearie said, but they are so far unwilling to give foreign entities the free rein to provide all the services demanded by the new Chinese middle class.

"The Chinese regulators are extremely intelligent, extremely capable, highly educated people who really get it," Dearie said. "And by 'get it' I mean they understand the importance of a world-class, effective, functioning, efficient, open and competitive financial system."

China's development has followed an odd combination of explosive growth and cautious incrementalism in some areas, especially when it comes to foreign competition. It knows where it is headed but it is reluctant to hand over too much control to outsiders.

Analogously, Dearie cited a common Chinese expression: "When crossing a busy stream, one stone at a time."

Commentary on developing China issues appears in every edition of China Headlines. Comments can be sent to Christopher Bjorke at cbjorke@chinaforum.com.

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