settlement services for Chinese enterprises. Their local currency operations were constrained (For details see Lardy (1998), Bhattasali (2002), Holz and Zhu (2000), Lo (2001), and Tong (2002)).

# **6.2.2. Post WTO Reforms: Restructuring and Consolidation**

In its GATS agreement, China promised to eliminate in a few years most restrictions on foreign entry and ownership in most of its services (Mattoo 2002). The committed schedule has indeed “locked in” some proposed reform steps, and made domestic reform agenda all the more urgent.

More than two years after China joined the WTO, a series changes have taken place.

**1. Strengthening supervision and regulation** . New regulation was passed by the State Council in December 2001 to give legal guidance to revoke problematic financial institutions. In 2002, PBC started the liquidation of Everbright International Trust and Investment Corporation. In May 2002, PBC published regulations requiring financial institutions to improve their information disclosure system. In April 2003, The China Bank Regulation Commission (CBRC) was established in charge of bank regulation. The People’s Bank Law and Commercial Banks Law have both been re-drafted together with the first Bank Supervisory Law that empowers the CBRC, they have been implemented starting from February 1 2004.

**2. Accelerating the Structural Reform in the Domestic financial Sector** . In October 2002, the government announced preliminary regulations governing mergers and acquisitions. Some foreign banks have started to negotiate with Chinese banks for M&A deals. And foreign financial institutions have been invited to form join ventures to dispose NPLs (Jin, 2002). In December 2003 CBRC Chairman Liu Mingkang **outlined plans for future reform** of the banking sector, “to improve retail banks’ badly damaged balance sheets, provide them with new capital, introduce better corporate governance, and foster competition through more foreign bank operations”. “Once the State-owned commercial banks have conditions in place for restructuring or issuing stocks, the central government will encourage them to accept overseas funding as well as domestic capital” (China Daily, January 7, 2004). Several commercial banks have been restructured by attracting foreign strategic investors, including the recent deal of HSBC acquiring in 19.9% of The Bank of Communications in August 2004. (see table 1)

In January 6, 2004, the State Council finished capital injection into Bank of China and China Construction Bank(CCB)—two of the “big four” state owned commercial banks selected for restructuring using 45 billion US dollars of the nation’s foreign exchange reserve. The capital infusion helped CCB become the strongest bank in Asia(excluding Japan) according to Tier One capital strength, number 21<sup>st</sup> in the world (The Banker, July 2004). It gave the banks a strong push in the process of their ongoing reforms that has a target of an eventual public stock offerings no later than 2006, when the banking sector is opened up to foreign banks under the WTO commitments.

**3. Encouraging domestic competition by establishing more shareholding banks.** Before entirely open its banking sector to foreign competitors according to its WTO commitments, China is trying to start opening the market to internal competitors first so that China’s banks could achieve improvement in management and accumulate more experience through more competitions. After the approval of the three new banking laws, **several new share-holding banks with private shares** are already under preparation. Bohai Bank with headquarter in Tianjin was approved last November (Great Wall Finance Research, January 8, 2004) Northeast Reconstruction Bank, Guangdong Nanhua Bank, Huaihai Bank and some other inter-provincial banks with private shares are expected to emerge in the near future. However all of these banks

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