Reference no: EM131142358

One paragraph Abstract of approximately 150 words, containing a main idea/thesis statement that expresses the overarching point of the research paper, and case research questions

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After years of negotiations, China finally acceded to the World Trade Organization (WTO) in December 2001. This development was a significant milestone in China's integration with the global economy. One of the most important and far-reaching consequences was the transforma- tion of China's financial sector. China's banking, insurance, and securities industries were long due for a major overhaul, and the WTO requirements guaranteed that the liberalization of China's economy would extend to the important financial sector. China's banking sector had become a casualty of the state. Banks and other financial institutions haphazardly extended loans to state-owned enterprises (SOEs) based not on sound credit analysis but favoritism and government- directed policy. As a consequence, crippling debt from bad and underperforming loans mounted, with no effective market disciplines to rein it in.

China recognized that opening up the banking sector could bolster its financial system. Foreign management would help overhaul the banking sector and put the focus fiscal agenda would ultimately lead to a stronger and more stable economy. Yet after years of direction from the state, Chinese bank managers did not have the necessary skills to transform the banks on their own. Guo Shuqing, shortly after being promoted to chairman of China Construction Bank, admitted that, "more than 90 percent of the bank's risk managers are unqualified."1

Immediately upon accession to the WTO, China's banking sector began to open to foreign banks. Initially, foreign banks were allowed to conduct foreign currency business without any market access restrictions and conduct local currency business with foreign-invested enterprises and foreign indi- viduals. In addition, the liberalization of foreign investment rules made Chinese banks attractive targets for foreign financial institutions. Sweeping domestic changes have followed. Strong emphasis has been placed on interest rate liberalization, clearer and more consistent regulation, and a frenzy of IPOs of state owned banks has followed. It was in this con- text that HSBC rapidly expanded its presence in China.