**_c. Insurance market was opened gradually according to the WTO commitment._** By the end of 2003, 15 cities have been opened to foreign insurers. Nine foreign insurance firms have entered the Chinese market since WTO accession, bringing the total of foreign insurers operating in China to **37** . They include 20 life insurance joint ventures, 14 non-life branches of foreign insurers, and three foreign reinsurers (China Daily, January 19, 2004). In terms of the business scope, China has fulfilled all of its WTO promises in the non-life sector after allowing foreign insurers into short-term health and casualty insurance by the end of 2003. For life insurance, foreign financial institutions is allowed to have a share of 50% or less in joint venture life insurance companies. According to China Insurance Regulatory Commission, “China is expected to implement all commitments regarding to life insurance by the end of 2004, which includes opening up group insurance and annuities.  All geographical restrictions are also scheduled to be removed before the end of this year. That will then allow foreign insurers to set up subsidiaries in any Chinese city.” (China Daily, January 19 2004)

# **III. Unfinished reform agenda**

It is clear from above that implementing GATS agreement has become a positive driving force for domestic restructuring in the financial sector. Although China’s Banking industry has gone through many changes, many huge challenges remain to be resolved.

**a. Problems with Non-performing loans remain serious and new NPLs are being created each day due to perverse incentives in a largely state owned monopolistic system.** NPLs have been estimated at about 25-30 percent of the total loans outstanding for the state commercial banks and higher for the rural credit cooperatives, city commercial banks and policy banks (World Bank 2003). Even though the CBRC reported a reduction of the NPL ratio from 26.12% at the end of 2002 to 16.86% at the end of 2003 in the four big state banks (China daily, January 12, 2004), the ratio is still much higher than international level (see table 3). Furthermore, the reduction in NPL ratio may be misleading since it might be the results of a rapid increase in total outstanding loans, but not the reduction of NPLs in absolute value. In 2002, the State Owned Banks used RMB112.7 billion profit in writing-off NPLs. But the NPLs only decreased about RMB40 billion in absolute value, which means there were RMB70 billion new NPLs (Xu, 2003). Agricultural Bank of China, one of the four biggest banks in China reported an increase in the level of its NPLs to 30% in the middle of 2003 (Oxford Analytica, 17 July 2003).

**Table 3 Comparison of some indicators between China’s banks and top banks in the world**

|Tier One<br>Capital $m|Return on<br>Assets %|Profit/<br>employee<br>$thousand|Basel<br>Capital<br>Adequacy<br>Ratio %|NPL to<br>total<br>loans<br>%|
|---|---|---|---|---|
|Citi-Group<br>66,871|2.08|98.54|12.00|2.69|
|HSBC<br>54,863|1.24|55.24|12.00|2.77|
|Industrial & Commercial -|||||
|Bank of China (ICBC)<br>20,600|0.05|0.83|5.52|21.24|
|Agricultural Bank of<br>16,435|0.10|n.a|n.a|30.07|
|China|||||
|Bank of China (BoC)<br>18,579|0.26|6.44|6.98|16.29|
|China Construction Bank<br>22,507|0.01|0.20|6.51|9.12|
|Source: The Banker, July 2004.|||||

The government’s capital injection would worsen the problem of perverse incentives. All state banks set the objectives of being listed on the stock market but they have to increase their capital adequacy ratio and reduce the NPL ratios before they can be considered a candidate for stock listing. There is an incentive to increase the denominator by expanding loans rapidly. A 20