Unit 4  Trade in Services

Recent developments in global trade have dramatically altered the face of the world’s economy. Trade in intangible goods such as knowledge and services are flourishing, while trade in manufactured goods appears to be entering a mature growth phase. The booming Tertiary Industry has not only provided a solution to some bottlenecks for economic growth, but also helped surplus capital find more ways to work in the economy. As a result, the total dollar value of trade in services is now greater than that of trade in goods. With information and intellectual property rights fast becoming objects of trade in the 21^st century, the world has entered the epoch of knowledge-based economy.

    Such changes have also found expression in some of the agreements of the WTO, successor to GATT. Under the old framework of GATT, tariff and trade in goods were the focal points of negotiations. However, after the founding of the WTO, new agreements like Information Technology Agreement, Basic Telecommunications Agreement, Financial Services Agreement, were reached to cover intellectual property rights and services. Now trade in services is the new focal point of negotiations among WTO members. In China, it is the area that bears the brunt of the shock following China’s WTO accession.

Chapter 18  Financial Services

    As the financial services industry plays a crucial role in the national economy, China has adopted a prudent and phase-in policy when meeting her commitments regarding the opening of the financial sector. The third year of China’s entry into the WTO will see a blend of opportunities and challenges for both domestic and foreign financial institutions.

    In 2004, financial services in Shanghai enjoyed sustained and healthy growth. During the first ten months, the added value of financial services reached RMB 60.931 billion, up 12.9% over the same period last year and accounting for 10.19% of the total output of Shanghai. By the end of October, total deposits in local and foreign currencies amounted to RMB1905.01 billion, an increase of 14.4% over the same period last year. Outstanding loans amounted to RMB1448.89 billion, an increase of 13.5% over the same period last year. However, the trading volume of the Shanghai Stock Exchange dropped by 2.26% during the same period, reaching RMB6436.2 billion, which accounts for 82% of the total in the country. Despite that, there was a 59.64% growth of volume in futures trading, reaching RMB7063.28 billion, which accounts for 56.2% of the country’s total. Interbank trading volume stood at RMB11031.729 billion, trading volume of foreign exchange reached RMB148.351 billion, and trading volume of gold amounted to RMB60.896 billion. Compared with the same period last year, there was also an increase of 6.53% in premium income, reaching RMB25.618 billion.

    As the testing ground for China’s reforms and opening up in financial services, Shanghai is progressing steadily by making double efforts to meet China’s commitments on the one hand and carry out the strategic decisions made by the central government on the other. As a result, the financial market of Shanghai has become a place where Chinese and foreign financial institutions are able to compete and cooperate with each other on the basis of equality and mutual development. This has helped pave the way for Shanghai to become an international financial center.

I. Foreign financial institutions are enhancing their presence in Shanghai.

Foreign financial institutions are in active pursuit of expanding business scope and establishing a greater presence in China by opening more branches in Shanghai. There are strong signs that foreign banks are moving their credit management and business processing centers as well as centralizing other operations in Shanghai. Currently, many foreign banks have established headquarters in Shanghai, making Shanghai their decision-making center in China. Twenty-four foreign banks have designated their branches in Shanghai as chief reporting branches. Shanghai has the highest concentration of foreign financial institutions in all of China.

II. There has been a gradual expansion of the scope of services offered by foreign financial institutions.

Take the banking industry for example, 8 foreign banks in China are allowed to offer financial derivatives to customers, and 31 are allowed to offer RMB business to domestically owned and operated enterprises. As a matter of fact, more than half of foreign banking institutions granted licenses to run RMB business have chosen to locate in Shanghai. The financial transactions of these banks account for more than 50% of total business volumes for all foreign banks in China as a whole.

Foreign banks mainly offer intermediary and personal banking services to large and strong enterprises and wealthy individuals respectively. Their primary means of securing market share is through product innovation and business integration. At the same time, foreign banks are making vigorous efforts to expand into new business areas and diversify marketing strategies.

III. Competition between Chinese and foreign financial institutions is becoming more intense.

Competition between Chinese and foreign financial institutions is becoming more intense as China opens wider to the outside world. By exploiting their competitive advantage in both services and products, foreign banks are able to snatch good customer resources from their Chinese counterparts and increase their market share. Besides, they have already achieved strategic advantage in business areas that Chinese banks have somehow unable or unwilling to enter.

IV. Partnership between Chinese and foreign financial institutions is being enhanced.

Along with ever-increasing competition between Chinese and foreign financial institutions, there has appeared new ground for cooperation between the two sides. Quite a few foreign banks are seeking strategic partnerships with Chinese banks in order to mitigate their weaknesses in the number of business operations, liquidation in RMB and customer information. At the same time, Chinese banks are making progress in attracting more foreign strategic investors, for example, HSBC has purchased shares of Bank of Communications and Bank of Shanghai, while Citi Bank has taken an equity position in Pudong Development Bank. Such partnerships are becoming more common place in China.

There have also been new breakthroughs in the area of securities and fund management with a number of Sino-foreign joint venture companies being established including: Everbright Securities Limited, BOC International Securities Limited, China Euro Securities Limited, Changjiang BNP Peregrine Securities Company Limited, SYWG BNP PARIBAS Asset Management, and China International Fund Management Company Limited (the joint venture between Shanghai International Trust and Investment Company Limited and J. P. Morgan Fleming Fund Management Limited).All these show that Chinese and foreign financial institutions are cooperating on a wider basis.

V. Competitiveness of Chinese financial institutions is being improved.

In order to improve competitiveness and catch up with foreign financial institutions, Chinese institutions have accelerated the integration of operational and human resources, changed business strategies and improved their services. At the same time, they are trying very hard to become more innovative so that they will be able to offer more products backed up by sophisticated technologies.

Year 2005 will be a crucial year for China in meeting her WTO commitments and opening up the financial sector. In December 2004, China removed all geographical and business restrictions previously imposed on foreign insurance companies. By the end of 2006, foreign and domestic banks will be governed by the same banking regulations and for the first time compete on a level playing field. More changes are expected to take place in financial services industry in Shanghai as market access keeps improving. While cooperation between Chinese and foreign financial institutions is going to be further enhanced, competition between them will become even more intense in the days to come. Shanghai will follow WTO rules and international practices and step up its efforts to achieve all-around development of its financial industry.

Box 18.1: Development Strategies Employed by Foreign Banks in Shanghai

    Quite different strategies have been employed by various foreign banks in developing their business in Shanghai. In terms of development strategies, there are three types of banks, namely ‘wholesale’ banks, ‘comprehensive’ banks, and ‘specialized’ banks. ‘Wholesale’ banks are those which focus their business on corporate banking by making the best of their present business locations. They either have no plan to launch retail banking services or are still studying the possibilities in this regard. ‘Comprehensive’ banks are seeking to develop both wholesale and retail banking by offering such service extensions as 24-hour self-service banking and ATMs. They are making aggressive efforts to set up operations at some of the most desirable business locations. ‘Specialized’ banks are trying to become business processing centers by centralizing functions – a typical strategy for them is to make their Shanghai branches regional processing and documentation centers.

In terms of business strategies, there are ‘enterprising’ banks, ‘prudent’ banks, and ‘conservative’ banks. ‘Enterprising’ banks are those which have high expectations for the Chinese market and are therefore determined to become major players of the emerging financial market in China. They tend to be large foreign banks which have gained dominant position in the market occupied by foreign banks and are actively pursuing the development of both wholesale and retail banking business. The ‘prudent’ banks are those which attach strategic importance to the Chinese market and serve mainly foreign-owned companies. They tend to be very cautious in offering RMB business to Chinese enterprises. They will start by offering loan business to Chinese enterprises with core competitiveness and creditworthiness in their relevant industries. The ‘conservative’ banks are mainly small-and-medium European banks. These banks are regional banks and have set up branches to meet the needs of their clients – the MNCs – in investment, financing and settlement of accounts. They exercise strict risk control over their operations in China and are therefore taking their time in developing business. They target clients with long-term sound business ties with their head offices and other branches.