Chinese finance system and the WTO

Contents

Table list and table of figures

1. Introduction

2. The World Trade Organization
2.1 Agreements and principles from the WTO
2.2 China’s way into the WTO

3. Chinese finance system
3.1 Chinese banking system – history –
3.2 Chinese banking system – problems –
3.3 Chinese banking system – foreign banks before the WTO –

4. Chinese banking system and the entry into the WTO – influence and changes –

5. Concluding Remarks

Reference

Table list and table of figures

Table 1: Structure of China’s Bank System

Figure 1: Shares on non-performing loans (1999)

Table 2: Equity ratio from the SOCB

Figure 2: Foreign banks in China (end 1999)

Table 3: China’s WTO commitments on financial market liberalization in the first five years

Table 4: Forecast; the trend of share deal from foreign banks in China (%)

1. Introduction

At a time in which geographical frontiers blur, the globalization unstoppably strides away and the world economy becomes more and more important, it is more significant, to have uniform guidelines to exclude discrimination and guarantee peaceful cooperation with each other.

For a country is it very important to be in accordance with the international claims, in order to be competitive. Since the last decade, China has been opened politically and economically. Thus they attempted to clear the existing delay as fast as possible, to develop a connection to economic leaders such as the US or Europe and then itself to play a significant role in the international economy. A step toward this goal was the entry into the World Trade Organization (WTO).

The following paper will tackle this topic, including analyzing the impact of the WTO on the Chinese finance system. But first, I will go over some details about the WTO, its agreements and principles. After this, I will discuss the course of Chinese entry and the ensuing problems. In the second part of the paper, the Chinese finance system will be explained, and more precisely, the Chinese banking system. At this I will illustrate the history of the banking system, the role of foreign banks in China before entry into the WTO and then present the problems of the system. In the third part it will analyze the variances and ascendancies, also the pros and cons of inclusion in the WTO.

2. The World Trade Organization

The World Trade Organization (WTO), with headquarters in Geneva/ Switzerland, is the only global international organization concerned with the rules of trade between nations and it is a part of the three^[1] most important international economic organisations^[2]. That is the reason why they have at the moment 148 members, which is equal to 90% of the world trade^[3].

The main objective of the WTO is to continue the liberalisation of world trade, to reduce customs duties and other trade hindrances, to control the international trading- and service agreements, to raise the standard of living, and to achieve full employment and protection of the environment^[4]. The WTO ensures that trade flows as smoothly, predictably and freely as possible with the goal to help producers of goods and services, exporters and importers conduct their business^[5].

2.1 Agreements and principles from the WTO

The three most important agreements which form the basis of the WTO are^[6]:

- GATT – Agreement (General Agreement on Tariffs and Trade)
- GATS – Agreement (General Agreement on Trade in Services)
- TRIPS – Agreement

(Agreement on Trade Related Aspects of Intellectual Property rights)

From these three “pillars” of the WTO, the GATT – Agreement has the greatest importance and the basic principles of the WTO have been developed from these agreements^[7]:

- Trade without discrimination
- Free trade
- Predictability: through binding and transparency
- Promoting fair competition
- Encouraging development and economic reforms

Trade without discrimination^[8]:

The general principle of non-discrimination requires WTO members to give equal treatment to competing suppliers, and not to discriminate between domestically produced and imported goods or services in their internal markets. If a country grants a special favour, for example a lower customs duty rate for one product, then it has to do the same for all other WTO members. This principle is known as most-favoured-nation (MFN) treatment.

Free trade^[9]:

The market-opening principle is the ambition to lower trade barriers. For example these trade barriers are customs duties (or tariffs) and measure such as import bans or quotas that restrict quantities selectively.

Predictability: through binding and transparency:

Many WTO agreements require governments to disclose their policies and practices publicly. That will ensure the transparency and predictability. With stability and reliability, investment is encouraged, jobs are created and consumers can fully enjoy the benefits of competition. The multilateral trading system is an attempt by governments to make the business environment stable and reliable. The outcome of this is a substantially higher degree of market security for traders and investors.

Promoting fair competition^[10]:

The WTO principle of undistorted trade involves general disciplines in areas such as subsidies and countervailing measures, antidumping and safeguards. But the WTO is not, as it is sometimes described, a “free trade” institution. The system does allow tariffs and, in limited circumstances, other forms of protection. Rather the WTO is a system of rules dedicated to open, fair and honest competition. The rules on non-discrimination, the MFN and national treatment are designed to ensure fair conditions of trade.

Encouraging development and economic reforms:

The WTO system contributes to development. Developing countries need flexibility in the time they take to implement the system’s agreements. This will be considered by the WTO in allowing for special assistance and trade concessions for developing countries. Over three quarters of WTO members are developing countries and countries in transition to market economies.

These principles are the foundation of the multilateral trading system and the fundamental principles run throughout all of the WTO documents.

2.2 China’s way into the WTO

The most important step to be a member in the GATT- Agreement was in the year 1986 with the membership application as a developing country. But after the “Tiananmen Square-Massacre” 1989, they abandoned the negotiations and China was temporarily on the offside. Then, in 1992, they resumed negotiations. But just two years later, the negotiations were put on hold again, because of the misunderstanding between China and Taiwan. In the year 1998 they resumed the negotiations to become a member in the WTO^[11] at a summit conference between China and the USA. In November 1999, China and the USA signed a bilateral trade agreement. For China this was an important step toward becoming a member of the WTO. In June 2000 the negotiations between China and Europe was completed and they signed a bilateral trade agreement. And in September 17th 2001 the negotiations between the WTO and China would be completed successfully^[12]. After 15 years of endless efforts, China finally became an official member in the WTO. The historical date is December 11th, 2001^[13].

But why did it take so long until China was a member in the WTO? There are a few reasons. One reason was the “Tiananmen Square-Massacre” 1989. After this occurrence the good relationship between China and the West was damaged, because China had a repressive government and that was incompatible with the principles of the WTO^[14]. Another reason was that China wanted a membership application as a developing country^[15]. Thus, China would have a number of advantages, because it is possible for a developing country to get a membership with lower standards and a longer transition term^[16]. But China had a high gross national product and consequently a strong economy^[17]. For this reason, the WTO disagreed with this claim and finally China gave it up in order to go ahead and get the membership.

3. Chinese finance system

In the following section, I will only be discussing the bank sector. The other sectors of the finance system will not be included.

3.1 Chinese banking system – history –

At the beginning, the People’s Bank of China (PBoC) exercised the central bank’s functions and powers, as well as handling industrial and commercial credits and savings business. In the year 1979, China commenced to reform and open up their banking system^[18]. The bank reforms in China started with the division of the PBoC into several state special banks and with that came the first step in the evolution of a new bank structure. The first special bank was the Agricultural Bank of China (ABoC). This bank is occupied with banking business in rural environments. The second special bank was the Bank of China (BoC), which is occupied by business relating to foreign countries, and the third special bank was the People’s Construction Bank of China (PCBoC)^[19]. 1984 was year the Industrial and Commercial Bank of China (ICBoC) was established and took on the banking business in the cities. Since that time, the PBoC was no longer a commercial bank. This position was assumed by the four State- owned Commercial Banks (SOCB) and the PBoC is now only the central bank^[20]. In 1986, the first independent bank, the Bank of Communications (BoCOMM), was authorized. After 1986, smaller independent banks were established. As a result of a minor crisis during development of the bank system, the SOCB had a liquidity problem. As a result, further reforms were necessary. One reform was that three policy banks were created in 1994: the State Development Bank (SDB), the Agricultural Development Bank of China (ADBoC) and the Import -Export Bank of China (IEBoC). The tasks of those three policy banks are to relieve the SOCB of political engagements and help them to start their transformation into commercial banks.

[...]

^[1] The International Monetary Fond (IMF) and the World Bank are the other two important organisations.

^[2] C.p. online (2002).

^[3] C.p. online (2004).

^[4] C.p. online (2004b).

^[5] C.p. online (2004c).

^[6] C.p. online (2002).

^[7] C.p. online (2004c).

^[8] C.p. online (2002c).

^[9] C.p. online (2004c).

^[10] C.p. online (2004c).

^[11] The WTO had detached the GATT- Agreement (1995).

^[12] C.p. online (2002).

^[13] C.p. online (2001).

^[14] C.p. online (2002).

^[15] C.p. online (2004d).

^[16] C.p. online (2004c).

^[17] C.p. online (2004e).

^[18] C.p. online (2003).

^[19] C.p. 1996 redefined in Construction Bank of China (CBoC)

^[20] C.p. online (2002b).