Overall, the main lesson of international experience is that foreign banks can bring important benefits if appropriate incentives and sufficient opportunities are created. In any event, with or without foreign participation, China's banking system needs to continue to forge ahead with fundamental reforms in internal control, risk management, and corporate governance, to improve the intermediation of China's large pool of domestic say IL. FOREIGN BANKS IN CHINA So far, foreign banks' direct activities have remained restricted. As of end-September 2006, foreign-funded banks accounted for 1.8 percent of total banking assets. Similar to other types of banking institutions, foreign-invested commercial banks are supervised and regulated by on their RMB-denominated operations, mainly in providing banking services to uma the China Bank Regulatory Commission( CBRC), and there have been important restriction in domestic banks. There have been three rather distinct phases in this entry into Chinese ors More recently, foreign banks are starting to play a more substantial role as minority invest 1996-2001: isolated transactions China: Ownershp Structure ofthe Frve largest Commercal Bunk with niche players like the Bank oo of Shanghai and Nanjing Commercial Bank Foreign somoN portfolio investors were mainly multilateral financial institutions who had no active operational role 2001-2004 with the conclusion of Chinas WTO negotiations, foreign banks' entry increased Entry was limited to joint-stock commercial banks and city banks Share ef Bank Assets Hed by Far in in major cities. The large state owned banks were in poor financial situation and foreign investors were mostly interested potentially the most profitable geographical areas. Smaller banks also required smaller investments Late 2004-present: foreign Arsem Mere investors' interest intensified Soures: CGFS CONK ECB; eatDmalcentnalbanks; BS. further, as reforms in the large4 S ha re o f B a nk As s e ts He ld by F o re ig n B a nks 0 20 40 60 80 100 Bulgaria Hungary China Ho ng Kong SAR India Ko rea Argentina Mexico 1990 2004 So urces : CGFS (2004); ECB; natio nal central banks ; BIS. Overall, the main lesson of international experience is that foreign banks can bring important benefits if appropriate incentives and sufficient opportunities are created. In any event, with or without foreign participation, China’s banking system needs to continue to forge ahead with fundamental reforms in internal control, risk management, and corporate governance, to improve the intermediation of China’s large pool of domestic savings. II. FOREIGN BANKS IN CHINA So far, foreign banks’ direct activities have remained restricted. As of end-September 2006, foreign-funded banks accounted for 1.8 percent of total banking assets. Similar to other types of banking institutions, foreign-invested commercial banks are supervised and regulated by the China Bank Regulatory Commission (CBRC), and there have been important restrictions on their RMB-denominated operations, mainly in providing banking services to individuals. More recently, foreign banks are starting to play a more substantial role as minority investors in domestic banks. There have been three rather distinct phases in this entry into Chinese banks. • 1996–2001: isolated transactions with niche players like the Bank of Shanghai and Nanjing Commercial Bank. Foreign portfolio investors were mainly multilateral financial institutions who had no active operational role. • 2001–2004: with the conclusion of China’s WTO negotiations, foreign banks’ entry increased. Entry was limited to joint-stock commercial banks and city banks in major cities. The large state￾owned banks were in poor financial situation and foreign investors were mostly interested in potentially the most profitable geographical areas. Smaller banks also required smaller investments. • Late 2004-present: foreign investors’ interest intensified further, as reforms in the large 0.0 200.0 400.0 600.0 800.0 1000.0 ICBC ABC BOC CCB BCOMM Strategic investors Financial investors (incl. IPO) Government agencies and companies China: Ownership Structure of the Five largest Commercial Banks (Total assets in billions of US$)