As of March 21, the government granted foreign banks, including CitiBank, Hongkong and Shanghai Banking Corp (HSBC), and Bank of East Asia (BEA), licences to provide forex service to local residents.

Within 10 days of the foreign banks entering the market, a price war in personal forex trading - "Waihuibao" in Chinese, a market closed to foreign players - broke out among Chinese banks.

On April 1, three banks, including the Bank of China, which has at least a 50 per cent share in the local forex market, slashed the range between buying and selling of foreign currencies to a record-low 10 base points.

"I've been keeping a close eye on the news to decide which bank to trade," said 23-year-old Lu Bin, who works with a domestic insurance company.

What has set fire to once frozen local players? The answer: World Trade Organization (WTO) membership.

China's entry into the WTO marked the start of a process that will lift restrictions on foreign banks within five years. CitiBank's acceptance of their first Chinese customer was only the beginning of the change.

"The nation's WTO entry opens up the market, and brings unprecedented competition to domestic banks from global heavyweights such as CitiBank and HSBC," said Xiong Jizhou, secretary-general of the Institute for Financial Studies at Fudan University.

Zhang Xiaobin, an official at the Bank of China's Shanghai branch, said they have yet to notice a decline in their foreign currency business, but added, "we do feel great pressure from the changes."

Analysts pointed out that most residents stayed with local banks due to the service charges levied by foreign banks.

However, all parties agree that the competition has begun.

Bad debts

To get into shape for the looming battle, Chinese banks have been busy cleaning up balance sheets laden with bad debts. BOC estimated that 30 per cent of outstanding loans at the four largest State-owned banks are non-performing.

According to Zhang, the Bank of China has always been serious about foreign competition in terms of both strategy and reforms. "We have made great progress in developing new products, training staff, marketing, brand name building, risk controls and so forth over the past few years," he said.

In the same month CitiBank accepted its first Shanghai customer, China launched an electronic network to unify the national payment system among domestic banks to better serve all cardholders in China. No foreign financial institutions have yet been accepted in the network.

The Shanghai branches of China's major banks have also launched various new services and products to form a unified transaction platform for e-banking services.

As is the case with many other financial professionals in China, Zhang is confident about the future of domestic banks, noting their better understanding of and client base in the local market.

Skills shortage

HSBC's China chief, Eddie Wang, said the competition between domestic and foreign banks won't get fierce till the market becomes fully open to foreign players in five years.

His position is supported by a Standard Chartered Bank study, which predicts foreign banks' market share in terms of assets and loans will rise to between 8 and 12 per cent over the next five years from the present share of less than 2 per cent.

However, the price war among domestic banks reveals that they are still not mature enough to face the post-WTO environment.

Xiong said an absence of innovative financial products - or professional skills to handle such products - leads local financial institutions to engage in price wars in traditional markets.

"It is improper to be bogged down in competition on price alone," Dai Xianglong, governor of the central bank, told students at Fudan University last month.

Local actions were so widely criticized by players and watchdogs that the price war ended soon after members of the Shanghai Banking Association agreed to resume the spread of 40 points.

Bank of China's Zhang said they did not want to join the war. "But faced with the fluctuating foreign exchange trading business, we had no way out but to follow suit."

He added that this is a good lesson for all the domestic banks as they have to fully prepare during the five-year-long buffering period for the competition to come.

"Foreign competition will help us to accelerate our reforms," he said.

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