several foreign banks have established branches and (more recently) subsidiaries in China; however, their share only amounted to around 2.4 percent of system-wide assets in 2007<sup>12</sup> . Insurance penetration by foreign providers, primarily in the form of equalparticipation joint ventures with local partners, has increased at a faster pace, with their market share in terms of premiums rising to around 6 percent in 2007. Foreign providers tend to be concentrated in a few large cities where they command a much greater market share than they do at the national level. Foreign participation in domestic securities markets is even lower than in banking and insurance because of greater entry restrictions (minority ownership in joint ventures) and a moratorium on new licenses, while overall cross-border trade in financial services is minimal due to capital account restrictions<sup>13</sup> . As a result, even though domestic financial institutions benefit from access to foreign capital and technical expertise (e.g. risk management, product development etc.), relatively little has been achieved to-date in terms of increased competition or greater product variety outside a few major cities.

**The slow pace of foreign entry partly arises from policymakers’ emphasis on liberalizing in a gradual, orderly manner to ensure financial stability and allow domestic financial institutions to build up expertise and commercial orientation** . Low penetration can be partly attributed to the fact that foreign financial institutions were only recently allowed to enter and compete in various parts of the financial system. However, there have also been complaints about China’s implementation record of its WTO financial services commitments and of the existence of regulations and administrative procedures (particularly of a prudential nature) that unduly increase the cost and slow down the pace of foreign expansion, effectively acting as indirect and _de facto_ (if not necessarily _de jure_ ) discriminatory barriers<sup>14</sup> . Although some of these measures may reflect the focus of the authorities on financial stability or their desire to allow sufficient time for domestic providers to adjust, others are an inevitable consequence of China’s momentous ‘catching up’ process in financial sector regulatory policies and the adoption of international prudential standards and codes (‘soft laws’).

> 12 According to Fitch Ratings (May 2007), 29 Chinese banks, accounting for around 53 percent of systemwide assets, have been invested in by foreign banks over the past few years.

> 13 In spite of significant _de novo_ liberalization as part of the WTO accession, China’s cross-border financial services trade commitments remain significantly lower than those made by the majority of developed countries in the GATS. As a result and according to data from SAFE, China’s total cross-border trade in financial services (both exports and imports) for 2005 amounted to only around US$300 million.

> 14 Examples include the inability of foreign banks to acquire more than 20 percent individually – or 25 percent in total – in domestic banks (differences in interpretation on the right of establishment under WTO commitments) as well as regulatory restrictions or delays on local incorporation, the extent of foreign currency funding/lending, the speed of branch expansion, the introduction of new financial products, the provision of electronic payments processing services by foreign credit card companies, the use of foreign reinsurance, the licensing of new securities firms, and the supply of financial information services by foreign providers. See USTR (December 2007), China’s Transitional Review Mechanism correspondence in the WTO Committee on Trade in Financial Services (www.wto.org), the Banking & Securities Working Group section of the European Chamber of Commerce (2007) report, and PricewaterhouseCoopers (September 2007 and June 2008) for more details.

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