The rapid expansion of foreign banks has increased the need to protect under-prepared Chinese banks, so as to ensure the safety of the local banking system, a top regulator said yesterday.

Shi Jiliang, vice-chairman of the China Banking Regulatory Commission (CBRC), said his commission is considering measures that are compliant with World Trade Organization (WTO) rules to manage the expansion of foreign banks in the local market.

Such measures may include encouraging foreign banks to head for central and western parts of the country to "reduce excessive competition between foreign and Chinese banks, and that among foreign banks themselves, in coastal and eastern cities," he said.

The commission is also considering banning foreign banks from buying equity stakes in more than two major Chinese banks, and further specifying the definition of foreign strategic investors that are being encouraged to participate in China's banking reform.

"We need to focus on having an appropriate level of protection for Chinese banks," Shi told the first China Financial Reform Forum.

But the commission will not do it "by simply giving them favourable treatment or restricting foreign banks, but by, under the WTO framework, containing the pace and geographic extension of foreign banks' market entry, so as to leave some time and space for Chinese banks to embrace the full-scale competition," he told the forum sponsored by the Financial Research Institute under the State Council Development Research Centre.

"But we will fulfill our (WTO) commitments," he added. "That will not be changed."

The business growth of foreign banks operating in China accelerated after the nation entered the WTO three years ago, with their total assets surging by 54 per cent and loans jumping 84 per cent since then, the official said.

Their local currency renminbi-denominated assets soared by 130 per cent from three years ago to 108.3 billion yuan (US$13 billion) at the end of last year, he said.

"We can say foreign banks have entered a relatively stable period of growth," Shi said.

Foreign banks had set up 211 operational entities and 220 representative offices in China by the end of last year.

They are currently allowed to conduct renminbi business in 18 Chinese cities, but all restrictions are scheduled to be removed at the end of next year according to the nation's WTO commitments.

The rapid expansion of foreign banks has intensified competition with local banks, although the landscape has not witnessed any noticeable changes, the official said.

While the market share of the nation's four largest State-owned commercial banks in assets, deposits and loans shrank to around 77 per cent at the end of last year, compared to 80 per cent and upward three years earlier, the lost ground has largely been taken over by joint-stock Chinese banks, he said.

Foreign banks' market share in terms of assets stands at 3 per cent currently.

But foreign banks have significantly increased their market share in such cities as Shanghai, where half of their assets are located, reporting a 12 per cent market share in total assets at the end of last year. "That was a sizable figure," Shi said.

And their growth looks set to accelerate further as the widely-cited advantages of local banks, such as funding resources and sprawling networks, become increasingly challenged.

While the growth of foreign banks' renminbi business has been "unexpectedly fast," their reliance on local banks for renminbi funding is expected to decrease as their renminbi assets continue to grow, the official said.

Source: China Daily