A quiet revolution has been launched in China: Foreign banks are being encouraged to take minority stakes in China's second-tier banks. The betting in Beijing is that the foreigners' knowhow will spark much-needed change. If the investment project catches on, it could be a turning point in straightening out China's troubled financial system (see "Open Season for Chinese Banks").
The introduction of real, market-oriented banks in China would have a ripple effect. Most immediately, China's thriving private sector would get a boost in the form of more loans and better services. That should increase efficiency and spur continued economic growth. For too long, China's financial mandarins have idly fretted that its banks and other financial institutions would face pressure from foreign competition. Now that China has entered the World Trade Organization, there's a nonnegotiable timetable for opening the market. By the end of 2006, foreign banks will be able to do everything that their local counterparts can.
The new policy of inviting foreigners in has never been officially announced. Many of the regulations governing foreign purchases of Chinese banks and other financial institutions are still being discussed in the government. A logical next step, though, would give a foreign buyer management control of a Chinese bank. China would do well to look at South Korea's example: One big reason that country recovered from the Asian financial crisis of the late 1990s with such strength was that it gave foreigners control of a handful of banks. The modern financial techniques that these outside investors brought forced the whole banking sector to shape up. That meant fewer loans to questionable corporate clients and more credit for companies that could pay the money back.
The embrace of foreign expertise and capital is a welcome sign that China's leaders know how serious the challenge is--and are determined to meet it. More deals need to happen, and the changes need time to sink in. But China has taken some important steps on a long journey.
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