As foreign banks double their efforts to court partners in China, the country's banking industry, scheduled to be fully open by 2006, has been thrust into a heated battle.

Even the Agricultural Bank, the smallest and least aggressive of China's Big Four state-owned lenders, has submitted a second joint-stock reform plan to the State Council, China's cabinet.

To float their shares, its domestic rivals have made headline news recently by responding to the court of foreign heavyweights.

Within the span of a month, the Construction Bank of China, forinstance, not only wrapped up a "blitz marriage" with the Bank of America but also received a one-billion-US dollar investment from the Singapore-based Temasek.

Although the Construction Bank had to give up 9.1 percent of its stakes and a directorate seat to the Bank of America, it will gain professional coaching services from 50 American consultants in fields "crucial to its public listing".

Meanwhile, the Britain-based HSBC Holdings channeled 1.747 billion US dollars via the Hong Kong & Shanghai Banking Corporation into the Bank of Communications, the largest joint-stock bank in China, and becomes the latter's second largest shareholder after the Ministry of Finance.

Other moves taken by foreign banks, albeit with relatively small repercussions, such as ING's purchase of 19.9 percent of stakes from Beijing Bank at a cost of 1.78 billion yuan (about 215.24 million US dollars), have also definitely heated up the competition in China's banking industry.

According to China's commitment to the World Trade Organization, restrictions on the foreign exchange and Renminbi businesses of foreign banks will be gradually phased out before 2006, which means domestic banks previously growing under the wing of government will have to rely on themselves.

An immediate menace exposed to them will be the loss of market shares to foreign rivals, which some experts say will be 20 percent in the beginning and at least one-third a decade later. Other complications will be the drain on quality clients and elite employees.

As some small and medium-sized indigenous banks unable to hold their own will have to go bankrupt, a danger of financial turbulence also exists, they said.

Given that China's financial safety has long been secured by three factors,the dominant advantages of state-owned banks,the sector's self-closure from foreign competition and the high savings rate, economist Xu Dianqing warned that a fully opened banking industry would bring unprecedented challenges to domestic lenders and banking authorities.

"Because of the strict control on the reminbi business, we cannow easily figure out the size of renminbi held by foreign banks and companies. If they attempt to attack our exchange rate system, we can pre-empt with ease. After the renminbi business is opened, however, that advantage will be lost," he said.

As a range of 10 to 20 percent of Chinese hold nearly 80 percent of saving deposits in China, if they transferred a tiny fraction of 10 percent to foreign banks, domestic banks would no longer have a dominant advantage in deposits, Xu said.

"That is why China's banking and auditing authorities have intensified their supervision of financial crimes," said Zhang Hanya with the investment department under the State Development and Reform Commission. "No responsible government would sit back and watch its financial system shatter to pieces."

Thanks to the Chinese people's tradition of putting money in banks, financial institutions saddled with non-performing loans and illegal capital transfers can always find fresh deposits to cover up their losses.

To eradicate such problems and prevent the issue from getting worse after 2006, the tightened supervision will surely bring out more bank crimes, industrial insiders predicted.

Optimistic about the prospect of China's banking industry, Zhang said that small banks may end up in bankruptcy, but larger banks will always have government bailout as their last resort when crises occur.

"Looking back to the 1997 Asian financial crisis, government control has proved powerful even in market economies such as the Republic of Korea, Singapore and Hong Kong," he noted.

Earlier this month, an emergency reaction guideline was issued by the State Council to alert banking authorities and financial institutions against possible crises.

Calling the guideline "a good comfort", many industrial insiders said that this document has demonstrated the central government's determination to solve the problems left over by the old banking system and to rise to new challenges.

Source: Xinhua