Competition in China’s Domestic Banking Industry

Once China has been accepted into the World Trade Organization, all the business and geographical limitations that previously restricted the activities of foreign banks in China will be removed gradually. China is expected to allow foreign banks to conduct foreign currency business for all foreign customers immediately, to allow them to conduct foreign currency business involving Chinese clients beginning one year after accession, and to allow them to conduct wholesale renminbi business two years after that. Five years later, foreign banks will be able to offer individual services to Chinese citizens, and all geographic restrictions will be eliminated. WTO entry implies an increase in competition in China’s banking industry. In this paper we examine the level and conditions of competition that have existed within the domestic banking industry since 1994. We show that existing institutional arrangements have inhibited effective and efficient competition in the industry. Competition within the industry is weak, and its role in improving banking efficiency has been limited. Fundamental institutional changes must be made before China can reap the full benefits of increasing competition once it has attained membership in the WTO.