1. FIMA Research Center, University of Hawai'i 1 China’s WTO Entry and Its Financial Sector Reforms S. Ghon Rhee College of Business Administration University of Hawai’i

2. FIMA Research Center, University of Hawai'i 2 Size of China’s Economy 2000 GDP ($billion) Per Capita GDP ($) USA 9,873$35,000 Japan4,750 37,000 China 1,080 850 Korea 457 10,940 Taiwan 309 13,275 Hong Kong 163 23,960 Indonesia 135 640 Thailand 116 2,010* Singapore 92 22,860 Malaysia 90 3,850 Philippines 66 845 * As of 1999

3. FIMA Research Center, University of Hawai'i 3 Asian Stock Market Performance 1995 – 1999 2000 2001 1 st Quarter, 2002 1995 – 1999 2000 2001 1 st Quarter, 2002 China16.10% 60.43% -21.89%-2.23% China16.10% 60.43% -21.89%-2.23% Hong Kong11.84 -14.39 -20.01-1.10 Hong Kong11.84 -14.39 -20.01-1.10 Indonesia 7.56 -38.50 -5.80 22.89 Indonesia 7.56 -38.50 -5.80 22.89 Japan -0.81 -27.19 -23.52 4.57 Japan -0.81 -27.19 -23.52 4.57 Korea 0.01 -50.92 37.4729.10 Korea 0.01 -50.92 37.4729.10 Malaysia -3.51 -16.33 2.42 8.62 Malaysia -3.51 -16.33 2.42 8.62 Philippines -5.11 -30.26 -21.84 20.16 Philippines -5.11 -30.26 -21.84 20.16 Singapore 2.06 -22.29 -15.74 11.06 Singapore 2.06 -22.29 -15.74 11.06 Taiwan 3.47 -43.85 17.0211.10 Taiwan 3.47 -43.85 17.0211.10 Thailand -18.74 -44.14 12.8823.07 Thailand -18.74 -44.14 12.8823.07 USA 24.56 -6.18 -7.10 3.82 USA 24.56 -6.18 -7.10 3.82

4. FIMA Research Center, University of Hawai'i 4 Expected Changes after WTO Entry 1.Banking Sector a. Corporate Banking by foreign banks:2 years b. Individual Banking by foreign banks:5 years 2.Insurance Sector a. Life Insurance: 50% foreign ownership b. Property & Casualty Insurance: Majority foreign ownership 3.Fund-Management Industry a. Initially 33% foreign ownership b. 49% foreign ownership in 3 years 4.Subsidies and tax breaks for State-Owned Enterprises (SOEs) must be phased out

5. FIMA Research Center, University of Hawai'i 5 Unexpected Surprises after December 11 WTO Entry (1) 1.Banking Sector a.Foreign banks are allowed to open one branch per year. Agricultural Bank of China:50,000 branches Industrial and Commerce Bank of China:44,000 branches Construction Bank:23,000 branches Bank of China:13,000 branches b.Foreign bank branches’ loan guarantee income is shrinking fast because of local competition from Chinese banks c.Return on Assets earned by foreign bank branches is only 0.03%. d.Still undefined, but equity capital requirement for foreign banks may be prohibitively high.

6. FIMA Research Center, University of Hawai'i 6 Unexpected Surprises after December 11 WTO Entry (2) 2.Insurance Sector a.New insurance licenses granted before December 11, 2001: 9 European insurers 2 US insurers b.Government approval on each licensee’s insurance business plan….may take more than a year. c.The above insurance business plan needs local insurance company as a partner…..Negotiations with potential local partners may be lengthy and prolonged process. d.Purchase of a local partner’s equity share….will be prohibitively expensive. e.Unresolved Issue: American International Group (AIG) has a wholly owned subsidiary in China. New licensees want an “equal treatment”… WTO arbitration may take years.

7. FIMA Research Center, University of Hawai'i 7 Unexpected Surprises after December 11 WTO Entry (3) 3.Fund-Management Industry Foreign fund management companies have two ways of establishing a joint venture: (i) Buy a 33% stake in an existing domestic fund management company or (ii) create a joint venture with an existing domestic securities company company. BUT, 15 domestic companies already have foreign partners. Government approval on the creation of a joint venture with a local securities company may take years. This means that a 33% stake in a domestic fund management company will carry a huge premium…..too expensive to buy! I

8. FIMA Research Center, University of Hawai'i 8 Weak Links in Chinese Economy Chinese government has all the incentives to create entry barriers for foreign firms Why? Government officials are keenly aware of weak links in its economy 1. Ailing State-Banking Sector 2.Struggling State-Owned Enterprises 3. Weaknesses in Capital Markets

9. FIMA Research Center, University of Hawai'i 9 Ailing State-Banking Sector (1) Current Status a. Big 4 state banks hold 75% of banking assets and 60% of bank deposits Agricultural Bank of China Agricultural Bank of China Bank of China Bank of China Construction Bank of China Construction Bank of China Industrial and Commerce Bank of China Industrial and Commerce Bank of China b.Non-Performing Loan Ratio Official Statistics: 25.37% Official Statistics: 25.37% Unofficial Estimates: 50% of total loans Unofficial Estimates: 50% of total loans Unofficial Estimate of NPLs: $350 billion ($169 billion of NPLs transferred to four Asset Management Companies in 1998)

10. FIMA Research Center, University of Hawai'i 10 Ailing State-Banking Sector (2) Current Status Current Status c.Poor Profitability: ROA=0.19% c.Poor Profitability: ROA=0.19% i.Interest receivable treated as income until loans are declared default ii.Loan-loss provision is subject to 1% of outstanding loan regardless of loan quality d.AMCs are a viable solution in China? i. Virtually illiquid markets for real assets d.AMCs are a viable solution in China? i. Virtually illiquid markets for real assets i.How can you sell SOEs? ii.Approximately 60% of new loans (extended after NPLs were transferred to AMCs) still go to cash- strapped SOEs in the form of working capital iii.No legal framework is in place to facilitate sale of AMC assets to foreign investors

11. FIMA Research Center, University of Hawai'i 11 SOE Sector Problems (1) Snap Shot of SOE Sector a.60% of industrial fixed assets 29% of industrial output b.Employs 55% of urban workers b.Average capacity utilization: Below 60% TV: 46.0%Telephone:51.4% VCR:40.3%Air Con:33.5%

12. FIMA Research Center, University of Hawai'i 12 SOE Sector Problems (2) c.Redundant Workers: 15 million or 10-15% of SOE work force d.Average debt ratio = 65 - 70% e.1 out of 4 SOEs is money-losing f.Plan to create 30-50 giant SOEs to compete with foreign multinational companies: Feasibility? Another series of handouts to failing SOEs?

13. FIMA Research Center, University of Hawai'i 13 Weaknesses in Capital Markets (1) a.Stock Market is Too Small Total Market Capitalization:$550 billion Tradable Shares:$192 billion Savings Deposits:$773 billion b.Investment Vehicles Are Limited Number of Financial Products Owned by Individual Investors Individual Investors Hong Kong:6.9 Korea:5.2 Taiwan:4.4 China:3.7 Source: McKinsey & Co.

14. FIMA Research Center, University of Hawai'i 14 Weaknesses in Capital Markets (2) c.Corporate Bond and Financial Derivatives Markets are Undeveloped 1. No corporate bond market 2.Financial derivatives market for bond futures were banned due to excessive speculation since 1995 3.Equity index futures and options are needed for risk hedging d.Improvement in Corporate Governance and Financial Disclosure is desperately needed.

15. FIMA Research Center, University of Hawai'i 15 To Sum Up 1.China will open the markets gradually at its own pace. 2.When the markets open, entry barriers will be high. 3.Financial sector will see the highest barriers.

16. FIMA Research Center, University of Hawai'i 16 Mahalo for You Attention!