WORLD TRADE
ORGANIZATIONTN/S/W/9
19 December 2002
(02-6991)
Council for Trade in Services
Special SessionOriginal:  English
COMMUNICATION FROM THE PEOPLE'S REPUBLIC OF CHINA
Assessment of Trade in Services1
The following document has been received from the delegation of the People's Republic of
China with the request that it be circulated to Members of the Council for Trade in Services.
_______________
China’s Services Trade:  Development and Experiences of the Opening-Up
This document was prepared pursuant to Article XIX:3 regarding assessment of trade in
services. China believes that assessment is helpful for individual members, especially the developing
members to participate in the current round of negotiations more effectively. Therefore, the aim ofpresenting this document is to contribute to the discussions on assessing trade in services under the
special session of Council of Trade in Services and for the reference of other WTO members only.
This report does not prejudge any positions of the People’s Republic of China on the
negotiations on trade in services.
INTRODUCTION
1. The Uruguay Round negotiations resulted in the creation of multilateral rules on services
trade for the first time, and made the first step in the long process of services trade liberalization.
While the Uruguay Round succeeded in establishing the framework of General Agreement on Trade
in Services, the efforts of members’ liberalization were moderate.
2. China participated fully in the Uruguay Round negotiations as an observer of the GATT. On
July 19, 1991, the Chinese delegation formally presented its initial offer of commitments on trade in
services (MTN.GNS/W/124) and conducted negotiations with GATT Contracting Parties on the basis
of offer and request. Later on, the offer was revised three times. In April 1994, China submitted its
conditional offer of commitments on trade in services in the form of schedule of specific
commitments (GATS/SC/19) according to the GATS.
3. Regrettably, China failed to resume its GATT Contracting Party status before 1 January 1995
when the WTO entered into force, and the negotiation on services became part of accession
negotiations. In the seven-year negotiations from 1995 to 2001, substantial commitments were made.
In some cases the level of opening-up was even higher than that of other members with higher level of
economic development.
                                                     
1 This assessment report was drafted based mainly on the material and statistics provided by the
relevant authorities governing various service industries in China.TN/S/W/9
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4. On December 11, 2001 China became a WTO member. Since then, the Chinese government
has made utmost efforts to implement its commitments and foreign services suppliers have been
granted meaningful market access in various services sectors.
5. This paper attempts to make a preliminary assessment of the development of China’s
domestic services industry and trade in services. Part I describes the development of China’s servicesindustry from 1978 to 2001. As a large developing country, China has accomplished tremendous
achievements in economic development in the last decade, but its services industry started off late and
is still at an underdeveloped stage. Taking into account the development level of China’s services
industry, it was not easy for China to make comprehensive and extensive commitments during the
accession, therefore the Chinese government faces a challenge of how to coordinate the opening-up
process with the development of domestic services industry. Part II analyzes the FDI into service
industry in recent years. The research indicates that foreign capital inflows to services industry arespeeding up and the market share of foreign investments increases dramatically. Since the service
export lags far behind the trade in goods, China starts to focus on the issue of trade balance in
services. Part III summarizes the experiences that China has had so far for the liberalization of its
services industry. Part IV concentrates on the opening-up of the banking services, from which some
preliminary conclusions are drawn.
I. DEVELOPMENT OF SERVICES INDUSTRY IN CHINA’S ECONOMY
1. The Role of the Services Industry
6. From 1990 to 2001, China’s GDP grew at an averag e rate of 9.3%, while the tertiary industry
grew at an annual rate of 8.3%, which was lower.  The proportion to GDP among three industries in
1989 was 25: 43: 32, whereas the proportion in 2001 was 15 : 51 : 34. Compared with 1989, the
proportion of the tertiary industry in national economy increased by 1.6% in 2001 (See Table 1). In a
dynamic perspective, the proportion of the tertiary industry in national economy continued to increase
from 1978 when the economic reform was initiated to 1992, and has experienced little changes in
recent years.
Table 1: Changes of Proportions of Th ree Industries in China’s Economy
Year First Industry Second Industry Tertiary Industry
1978 28.1 48.2 23.7
1989 25.0 43.0 32.0
2001 15.2 51.1 33.6
Data source: the State Bureau of Statistics, 2002
7. In terms of employment in the three industries, the structural change appears even more
manifest. The employment in the tertiary industry increased from 12.2% of the total in 1978 to 18.3%
in 1989 and 27.7% in 2001 with an annual growth rate of 0.7% (See Table 2). In a dynamic
perspective, the distribution of employment in three industries shows the following trend, i.e.,
employment in the first industry declined, while that of the tertiary industry increased, and that of thesecond industry changed slightly. It was from 1994 that the employment of the tertiary industry
surpassed that of the second industry.TN/S/W/9
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Table 2: Changes of Three Industries’ Employment (percentage)
Year First Industry Second Industry Tertiary Industry
1978 70.5 17.3 12.2
1989 60.0 21.6 18.3
2001 50.0 22.3 27.7
Data source: the State Bureau of Statistics, 2002
8. The structural change of the three industries in the national economy is basically consistent
with the pattern of the evolution of industrial structure world wide, i.e., the decrease of the first
industry in national economy with the increase of  other two industries. In terms of changes in
proportion of the three industries, the structural change was most significant in the middle of 1980s’,
i.e., the proportion of the tertiary industry exceed ed that of the first industry in 1985, and the growth
of national economy was hence mainly driven up by the second and the tertiary industry instead of by
the first and second industry. From 1990-2001, in the 9.3% annual growth of GDP, 5.8% could be
attributed to the second industry, 2.5% to the tertiary industry, and the first industry, the remaining
1%.
9. In recent years, the tertiary industry played a more and more important role in creating jobs
and absorbing unemployment of surplus labours, particularly in the urban areas. However, the
efficiency of the tertiary industry remained low and needs to be promoted urgently.
2. Problems and Difficulties
10. Compared with most of other countries in the world, the proportion of China’s tertiary
industry in the national economy is much lower. Co nsequently, employment in service industry is also
comparatively lower. Nowadays, in most developed countries the proportion of tertiary industry in the
national economy has reached 60%-80%, and the average level of developing countries is around
50%, but in China, the indicator in 2001 was just 33.6%. With regard to the structure of the tertiary
industry, the mainstream industries in the developed countries are information technology,
consultation, research and development, and financial industries, whereas in China, the mainstream
industries are commercial and traditional services (e.g. retailing and restaurants), and some
infrastructural service industries such as postal and communication industries. Moreover, the gaps ofdevelopment in services industry among various regions of China continue to expand (See Table 3).
The Chinese government now is facing a huge task to develop the tertiary industry by all means and
encourage investment from both home and abroad.
Table 3: The Proportion of the Tertiary Indust ry in the Western, Middle and Eastern China
proportion of the tertiary industry (%)
YearWestern Middle Eastern
1978 18.8 18.1 19.5
1989 27.5 28.9 30.4
2001 38.3 35.4 40.2
Data source: the State Bureau of Statistics, 2002TN/S/W/9
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II. DEVELOPMENT OF TRADE IN SERVICES
1. Present Situation of Trade in Services in China
11. China’s service trade has been growing steadily with increased share in the world total trade
in services. In the past ten years, the annual growth rate of the exports of the trade in services of China
was above 9%, which was higher than the world’s average. In contrast to the stagnancy of the trade inservices world-wide in 2001, China’s service export achieved an increase of 9% (See Table 4 and
Chart 1).
Table 4: China’s Service Export and Sh are in the World Total (1985-2001)
Unit: Million US Dollars
Year Service Export Share in the World Total
(%)
1985 2925 0.77
1990 5748 0.73
1995 18430 1.55
1998 23879 1.79
1999 26165 1.9
2000 30146 2.06
2001 32903 2.26
Data source: International Trade Statistics, WTO, 2001, 2002
Chart 1:  China’s Service Export and its Share in the World Total
Unit: Million US Dollars
05000100001500020000250003000035000
1985 1990 1995 1998 1999 2000 200100.511.522.5
Service Export Share to the Worl d
Data source: International Trade Statistics, WTO, 2001 and 2002TN/S/W/9
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12. Compared with trade in goods, China’s service e xport is still at a lower level. The service
export only accounted for 11% in the total export in 2001, which was much lower than the average
rate of the World 19% (See Table 5). Meanwhile the goods export of China amounted to 4.3% of the
world’ s total, and the exports of the trade in service only made up 2.3%. These two numbers revealthat China’s service export is still under-developed.
Table 5:  Service Exports and Share in China’ s Total Export and the World as a whole, 2001
Percentage
Export
(Billion US$)Service Export
(Billion US$) Goods Export Service Export
World 7613 1458 81 19
China 299 33 89 11
Data Source: WTO 2001
13. On the import side, China has been a net importer of services. China has experienced deficit
in service trade for a long time. For the time being,  The deficit in services trade appeared from the
beginning of 1990s’ and the figure increased gradually. In 2001, the services trade deficit amounted to
US$ 6.36 billion, and increased to US$ 4.33 billion in the first half of 2002. There is no doubt that the
overall services trade deficit in 2002 shall exceed that of 2001 (Table 6 and Chart 2). The tendency ofincreasing services trade deficit implies that the ex port capability of China is quite limited. China’s
export capability is further restricted by trade barriers in some service sectors that China has
comparative advantage and competitiveness.
Table 6:  China Service Trade Status, 1985-2001
Unit: million US$
Year Export Import Balance
1985 2925 2261 664
1990 5748 4113 1635
1995 18430 24635 -6205
1998 23879 26467 -2588
1999 26165 30967 -4802
2000 30146 35858 -5712
2001 32903 39260 -6357
2002* (Jan-June) 18099 22425 -4326
  Data Source: WTO, 2002
*China State Administration of Foreign Exchange, Balance of Payment Sheet, September 2002TN/S/W/9
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Chart 2. China Trade in Service Deficit, 1997-2002
-10,000010,00020,00030,00040,00050,000
1997 1998 1999 2000 2001 2002*Export
Import
Deficit
Data Source: Balance of Payment Sheet, State Administration of Foreign Exchange, 1997-2002
*The data is an estimated number based on the data collected in the first half of 2002 by the State
Administration of Foreign Exchange.
2. Service Industry Became a New Field for FDI after Accession
14. The FDI flowing into China has been incr easing stably since 1999 (See Table 7 and
Charter 3). Currently, China is one of the leading countries to absorb foreign investment. According
to the statistics by the Ministry of Foreign Trade and Economic Cooperation (MOFTEC), 24,771
foreign invested enterprises had been established from January to September this year with the growthrate of 33.4% compared with the same period of last year. The contractual foreign investment
amounted to US$ 68.4 billion with the growth rate of 38.4%, and the actual foreign investment
amounted to US$ 39.6 billion with the growth rate of 22.6%. By the end of September 2002,
altogether 414,796 foreign invested enterprises have been established with contractual and actual FDI
of US$ 813.7 billion and US$ 434.8 billion respectively. It is predicted that the overall actual foreigninvestment in 2002 will exceed US$ 50 billion. After the entry into the WTO, China has made a great
stride in terms of absorbing foreign investment due to accelerated opening-up and improved
investment environment.
Table 7:  Figures on Foreign Direct Investment (1983-2001)
Unit：100 million US Dollars
Year Contractual Foreign
InvestmentActual Utilized
Foreign investment
1983 19.17 9.16
1989 56.00 33.93
1997 510.03 452.57
1998 521.02 454.63
1999 412.23 403.19
2000 623.80 407.15
2001 691.95 468.78
Data source ：Statistics on Foreign Direct Investment, MOFTEC, 2002TN/S/W/9
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Chart 3:  The development of Foreign Direct Investment in China, 1983-2001
Unit:  100 million US Dollars
0100200300400500600700800
1983 1989 1997 1998 1999 2000 2001Contractual Foreign Investment Actual Use of Foreign Investment
Data source ：Statistics on Foreign Direct Investment, MOFTEC, 2002
15. With the development of trade in services, foreign investment in China’s services industry
increases gradually, which deserves special highlights. In 2001, the investment in services industry
accounted for 26% of the total FDI. (See Charter 4)
Chart 4:  Proportion of Foreign Invest ment in Different Industries in 2001
72%2%
26%
First Industry Second Industry Third Industry
Data source ：Statistics on Foreign Direct Investment, MOFTEC, 2002
16. From January to September 2002, 5801 foreign enterprises were established in the services
industry, increased by 27.4% and accounted for 23.4% of the newly established foreign enterprises. InTN/S/W/9
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the same period, the contractual foreign investment in this industry amounted to US$ 16.14 billion
with the growth rate of 38.6% and accounted fo r 23.6% of the contractual foreign investment. The
actual foreign investment amounted to US$ 9.46 billion with the growth rate of 49.1%, and accounted
for 23.9% in the actually utilized foreign investment. The distribution, logistics, medical, educational,
cinema, real estate and financial services have been the new fields absorbing more foreign investment.Chart 5 demonstrates the proportion of various services sectors in absorbing foreign capital.
Chart 5:  FDI in Different Service Sectors (January – September, 2002)
Business
Communication
Construction
Distribution
Hospital related and Social
Services 
Travel
Recreation, Cultural and Sports
Transportation
Data source ：Statistics on Foreign Direct Investment, MOFTEC, 2002
III. SUMMARY
17. The progressive liberalization of services in the past decade brings up the following
opportunities and challenges for Chinese domestic service industry.
1. Opportunities
18. The opening-up helps introduce foreign capital into the services industry that has been short
of funds from domestic investors, thus accelerating the development of service industry. One obvious
advantage is that in many services sectors, consumers started to enjoy new and better services due to
the fast growth of service industry.  For exampl e, in the banking sector, loans from the foreign-
invested banks have become one of the important channels of foreign capital inflow. By the end ofJune 2002, the outstanding loans of foreign exchange from foreign-invested banks had reached
US$ 18.2 billion. Personal customized banking service, as a new banking service recently introduced
by foreign-invested banks has enabled Chinese customers to enjoy more and better banking services
besides the traditional personal saving service.
19. The opening-up helps to introduce advanced technologies and management experience from
foreign investors and competition mechanism, promote the development and growth of domestic
service market, and trained many professionals. Take insurance market as an example, after entering
into Shanghai market, AIG (American Internationa l Group) introduced world recognized insurance
marketing system, stimulated insurance market, strengthen the idea of customer-oriented services of
Chinese insurance companies, and promoted the speedy development of personal life insurancemarket. Shanghai’s total premium increased at an annua l rate of 30%, much higher than that of other
closed cities. The scenario of expansion of both Chinese and foreign companies has been observed.TN/S/W/9
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20. Liberalization accelerated the process of reform of Stated-Owned Enterprises (SOEs). In
order to accommodate the development of Chinese market economy and the competition from foreign
service providers, the Chinese government has made its every effort to transform the big wholly-state
owned enterprises into state-controlled stock comp anies by absorbing both foreign and private capital,
so as to establish modern structure of corporate governance and to increase competition capacitysubstantially.
21. China’s accession has helped Chinese services providers to tap and get access to international
market. After China’s accession, awareness of Chinese enterprises to enjoy the right of the WTO and
expand services export has been rising. While continuing the exploration of the export advantages in
tourism, construction and related engineering services and international maritime services, Chinese
enterprises start to “go abroad” in some new service sectors. In insurance services, China People’s
Insurance Company Inc. (Hong Kong) has just been established last November. This is an importantstep that Chinese insurance companies have taken to go to overseas insurance market after the
accession. In telecommunication services, China Telecommunication Company Inc. (U.S.) had been
granted a license to conduct international telecommunication business such as international long
distance call between China and the United States, leased line and data services, transmission of TV
programs and other business services.
2. Challenges:
22. Foreign service providers have grasped more market share in the Chinese services market. In
insurance sector, in the city of Shanghai that has been open to foreign insurers as early as 1992, the
share of foreign-invested insurance companies in th e total market in terms of insurance premium had
nearly tripled, increasing from 3.8% in 1994 to 14% in 2000. In another open city of Guangzhou, thelife insurance premium income of foreign-invested insurers has taken up 16% in the life insurance
market.
23. For advertisement services, up to the end of 2001, there were 46935 advertisement companies
in China among which 329 were foreign-invested. In terms of number, foreign-invested advertisement
firms only accounted for less that 1%. However, if counted in term of business volume, foreign-invested firms accounted for 20% of the total market. After the accession, foreign-invested firms have
been developing even faster. In 2002, 39 new licenses have been issued, which raise the total number
of foreign-invested advertising firms to 368, an increase of 11.85% from 2001. On the contrary, the
number of domestic advertisement firms was shrinking. It is safe to say that the competition will heat
up further more when foreign advertising firms could establish 100% foreign-owned enterprises five
years after China’s accession.
24. Meanwhile, Chinese small and medium sized enterprises found it difficult to develop their
business facing fierce competition from big foreign competitors. Story can be found in the distribution
sector. China’s biggest retailer, Shanghai Lianhua only had sales volume of US$ 1.7 billion in 2001.
This number is less than 1% of that of the U.S. biggest retailer Wal-Mart, which was US$ 200 billion.
After China’s accession, 28 new foreign-invested retail chain stores have been established, among
which 24 stores have operation areas over 10000 square meters. According to the latest statistics fromthe SETC (State Economic and Trade Commission), foreign department stores take up 6% of the total
number. But in the category of big supermarkets, foreign chain stores take up 23% of the total
number. This percentage is pretty high compared with that of other service sectors. Though customers
could enjoy better services and cheaper merchandize from those big foreign supermarkets, on the
other hand many local small retailing stores collapsed. The Chinese government is now facing achallenge of how to deal with the development of small and medium sized enterprises while
introducing foreign competition, since the small and medium sized enterprises are very important to
the employment and economic dynamics.TN/S/W/9
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25. The “brain-drain” effect brought by the foreign investment is further amplified. Take legal
service as an example, there are altogether 120,000 lawyers and 10,000 law firms in China by 2002,
most of which only employ around te n lawyers. The number of law firms that employ more than 100
lawyers is less than 20. Meanwhile fewer than 2000 lawyers, most under the age of 40, are capable of
practicing foreign law in foreign languages. They are the backbone of law firms that conductinternational legal businesses, however, most of them are employed by representative offices of
foreign law firms, which leads to the lack of key personnel in local law firms and indirectly hurts the
development of China’s legal services industry.
26. The imbalance of economic development between regions will be further widened. With the
entry into the WTO, China’s investment environm ent has greatly improved. However, more foreign
investments are directed to eastern China, which enjoys a comparative advantage. The gap between
the west and the east is further widened. For example, more than 80% of the international law servicesand large-scale legal service projects are conducted in coastal cities and Beijing. Last year, more than
1/4 of the total income of China’s legal sector derived from Beijing and Shanghai only. Meanwhile, a
large number of law firms in the vast area of western China hardly made any profits.
27. The deficit in services trade has a negative impact on the balance of payments of China.
According to the statistics provided by the State Administration of Foreign Exchange, the deficit inChina’s services trade will reach a record high of US$ 8 billion by the end of 2002, an increase of
more than 30% compared with last year. Looking into  the data of the last few years, we can find that
while the surplus of China’s goods trade is diminishin g, the deficit in services trade is in a dramatic
increase, which in the long term will deteriorate China’s balance of payments situation.
3. Preliminary conclusions
28. Before the opening-up, China pursued a planned economic system and the importance of
services industry in the national economy was ignored to a large extent. After the introduction of
economic reform and opening-up, although China’s services industry has developed rapidly, there still
exists a great gap between services industry of China and that of many other WTO members.
Therefore, China’s services industry lacks competitive edge in international market. Generallyspeaking, some of China’s services industries are still at its infancy and the infrastructure is in an
urgent need of strengthening, thus the government has to attach great importance to the following
aspects in the process of liberalizing its service trade:
29. Strengthening the legal framework.  In some service sectors of China, the basic governing
laws were just enacted and some are still under drafting. The Insurance Law was revised recently. The
Postal Law is still in the revision process, while the drafting of The Telecommunication Law is still
under way. Many important laws related to foreign investment were just enacted upon China’saccession. The insufficiency of laws and regulations pose many difficulties not only to the business
operation of foreign service suppliers, but also to the opening-up process and governmental
administration. However, for a developing country like China, the enactment of law is never an easy
task, while the constant changes of service market make it more difficult.
30. Building up regulatory capacity.  As stated before, in many service sectors, the governing
laws and regulations have not yet taken shape. The competent authorities lack both experience and
regulatory capacity. Under these circumstances, the opening-up may lead to market disorder and
therefore calls for necessary regulation by the government.
31. Providing “breathing space” for the reform of state-owned enterprises.  At present, the
reform of state-owned enterprises has entered into a crucial period. In order to standup to thechallenges brought about by market opening and competition from foreign service suppliers, thisTN/S/W/9
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reform is inevitable. However it takes time, esp ecially for the SOEs in the financial sector (see
paragraph 51 of Part IV).
32. Therefore, China believes the liberalization of trade in services should be progressive and
managed.
IV. CASE STUDY: OPENING-UP OF CHINA’S BANKING SERVICES
1. Current Situation of China’s Banking Sector
33. At present, the state-owned commercial banks take a leading position in China’s banking
sector, while at the same time the joint-stock banks and foreign-funded banks become more and more
active in the arena. By the end of October 2002, the market structure in the banking sector is as
follows:  three policy banks, four state-owned co mmercial banks, 11 joint-stock commercial banks,
112 city commercial banks, approximately 38,000 rural credit cooperatives and 180 foreign-funded
operational banking institutions. By the end of 2001, the total assets of financial institutions amountedto RMB 21.7 trillion (not including the securities and insurance institutions).
34. Before 1995, People’s Bank of China, the central bank of China was the sole regulator of
China’s financial market. In 1995, for prudential consideration, China decided to adopt a segregated
regulatory framework in its financial system, which led to the establishment of two new regulatory
authorities, namely China Securities Regulatory Commission, and China Insurance RegulatoryCommission, which are responsible for supervising the securities and insurance sectors respectively,
while the People’s Bank of China remains as the regulator of the banking sector. After this systemic
adjustment, China’s capacity to regulate the financial market and keep away financial risks and crises
has been remarkably improved.
2. The Opening-up Process of China’s Banking Sector
35. This process could be characterized into the following four stages.
36. Stage one: Foreign banks were allowed to set up non-operational institutions (i.e.
representative offices) in China. In 1979, the representative office of Japan Export and Import Bank
was established in Beijing, which was the first representative office of foreign banks in China.
37. Stage two: Foreign banks were allowed to set up operational institutions. In July 1981,
foreign banks were allowed to conduct foreign exchange business in Shenzhen and other three Special
Economic Zones; in September 1990, Shanghai became the first coastal city opened to foreign banks
following five Special Economic Zones. Starting from 1992, the opening area was further expanded to
other seven coastal cities. In January 1999, the geographic restrictions on the establishment of foreign
banks were lifted and foreign banks were allowed to conduct business in all main cities of China.
38. Stage three: Foreign banks are allowed to conduct the local currency business on a pilot
basis.  In December 1996, foreign banks in Pudong, Shanghai were allowed to conduct RMB business
after meeting certain conditions. In August 1998, the same treatment was granted to the foreign banks
in Shenzhen.
39. Stage four: Overall opening-up of China’s banking sector. Within two years after China’s
accession, foreign banks will be allowed to provide local currency business to domestic-funded
enterprises.  Within five years after accession, they will be allowed to provide business to all Chineseresidents. The liberalization at this stage is more substantive than the previous ones. Starting from
11 December 2001, foreign banks are allowed to conduct foreign currency business to all kinds of
clients without geographic restrictions. Currently, foreign banks may conduct RMB business inTN/S/W/9
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Shanghai, Tianjin, Shenzhen and Dalian. By the e nd of 2002, the opening area will be expanded to
Guangzhou, Zhuhai, Qingdao, Nanjing and Wuhan. For the following four years, more cities will be
opened by end of each year till the end of 2006, when all the geographic restrictions on foreign banks
will be eliminated.
40. With the deepening of China’s reform and opening-up process, foreign banks accelerated
their entrance into China’s banking market. By September 2002, there were altogether 384 foreign
banking institutions in China, including 180 operational entities from 20 countries/regions, among
which 147 were foreign bank branches and eight were sub-branches. Meanwhile foreign banks from
37 countries/regions have set up 204 representative offices in China.
41. By the end of 2001, the aggregate assets of foreign banks in china constituted 1.52% of the
aggregate assets of China’s banking sector. However, foreign exchange loans issued by foreign banks
constituted 20% of the aggregate amount of the foreign exchange loans issued by all the bankinginstitutions in China. Taking into account the small share of the assets of foreign banks and the fact
that foreign banks were only allowed to conduct foreign exchange business by 2001, foreign banks in
China have developed very fast. Nevertheless, the expansion of foreign banks will be further
accelerated with the phasing-in of China’s accession commitments. Since December 2001, China has
opened the local currency business to foreign banks partially. By October 2002, the local currencyassets of foreign banks amounted to RMB 47.8 billion, and the aggregate outstanding local currency
loan was RMB 38.5 billion.
42. During the above-mentioned liberalization process, the regulatory framework of China’s
banking sector has been gradually reformed and reinforced in consistency with international practices.
While keeping consistent with domestic specific situation, People’s Bank of China has absorbed asmany as possible reasonable proposals on investment from the Basel Committee to administer and
regulate the access of institution, business scope and personnel of foreign banks based on prudential
principles.
3. The Opportunities and Challenges of the Opening-up
(a) Opportunities:
43. Increasing foreign capital inflows and im proving the investment environment. By
June 2002, foreign exchange loans issued by foreign banks amounted to US$ 18.2 billion, among
which 80% were loans to domestic enterprises and 70% were financed by means of lending from
parent banks or international financial markets. Foreign banks have become important channels of
bringing in foreign capitals. More participation of foreign banks into China’s market is improving the
function of financial system and provides more advanced services to all consumers in China.
44. Facilitating reforms in banking system, promoting the competitiveness of domestic
banks. Most foreign banks investing in China have long history of development in their home
markets. They bring into China’s financial market  ample experiences in corporate governance, risk
management, internal controlling, incentive mechanism, business innovation, market exploration and
accounting system. All these exert strong pressure on China’s domestic banks that must take concrete
measures to deepen their systematic reforms and enhance their competitiveness.
45. Creating opportunities for domestic-funded banks’ exploration of international
financial markets. While foreign banks have more access to Chinese market,  Chinese banks are also
accelerating their pace to “go abroad”. Though at a much slower speed compared with foreign banks,
China had set up more than 90 branches and representative offices in overseas market, including
Hong Kong China.TN/S/W/9
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(b) Challenges:
46. Domestic banks are losing market share and high-end consumers. Statistics show that, in
banking sector, 80% of the profits come from 20% of the high-end consumers. With the business
expansion of foreign banks, certain portion of cons umers, especially those high-end clients start to
turn to foreign banks due to fierce competition.
47. Domestic banks are losing capable executives.  The more flexible and transparent promotion
and incentive mechanism of foreign banks are of great attractiveness to many experienced senior
executives and key personnel in domestic banks, which leads to a certain “brain-drain” effect in the
sector.
48. The banking regulator is under harder pressure in macro-regulation of financial system
and the implementation of central bank functions.  With further opening-up, the fluctuations of
world economies, through international trade and other channels, will affect China’s domesticeconomic performance to a larger extent. As more foreign banks expand their business in China, the
exchange between local currency and foreign currencies will increase dramatically and bring about
more frequent inflows and outflows of international capitals, which in turn will have greater impact
on the implementation of China’s monetary policy. Accordingly the macro-regulatory mechanism of
financial market is facing more challenges.
4. Preliminary Conclusions
49. According to China’s accession commitments in banking sector, at the end point of phasing-
in period (five years after accession), the limitations on local currency business and on consumers will
be fully eliminated. When this assessment report is drafted, the implementation of China’s
commitments only enters into the second year. Therefore it’s still too early to make a final conclusionof the impact of the full implementation of China’s commitments on China’s banking sector.
However, some preliminary conclusions could be drawn form the above analysis.
50. Compared with developed members, China’s banking sector is still in the process of
continuous reform and further improvement. A financial system conducive to the market economy is
just taking shape and domestic banks still lack competitive edge. The administrative capacity of theregulatory authority still falls far behind that of many of its counterparts in developed members. With
the rapid expansion of foreign banks in the market, the financial innovations are accelerated;
transaction techniques become more complicated and China’s financial institutions are experiencing
tremendous changes. These in turn increase the risks and instabilities of the market and add more
difficulties and costs to financial administration.
51. The non-performing loan (NPL) is one of the major concerns of Chinese domestic banks,
particularly of four big stated-owned banks. Our goal is that within five years, the ratio of NPL will be
decreased to 15%, which coincides with five-year phase-in period in China’s commitments on
banking services. The major issues to be addressed include corporate governance, capital sufficiency,
restructure and streamline of the branches and subordinate bodies. The fulfillment of these goals is
also a time-consuming process. Therefore, we deem it necessary to make liberalization a progressive
process that should keep pace with the reform of state-owned commercial banks. In other words, the
liberalization process and domestic financial reform process should be mutually reinforced
(Mattoo, 2002).
52. In conclusion, liberalization of the banking sector has played a role in improving the function
of China’s financial system. Therefore, the process will keep going on in China. Meanwhile, from the
perspectives of regulation, reform and market development, a gradual liberalization process is of theutmost importance to China’s banking sector.TN/S/W/9
Page 14
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People’s Bank of China, Statistics on Foreign-funded Banks, 2001 and 2002State Administration of Foreign Exchange of P.R.  China, Balance of Payment Sheet, Various Years
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