China’s recent accession to the World Trade Organization (WTO) will create opportunities for foreign and domestic players seeking to tap into the country’s booming market for retail financial services. But before these companies can cash in, they will have to overcome some hurdles, even as the demands of China’s most profitable banking customers redefine the competitive landscape. Indeed, a recent survey suggests that changing consumer preferences may have a more immediate impact than the WTO-mandated regulatory reforms.

Although some product markets will open up for foreign institutions, the playing field will not be as level as many had expected. Foreign banks won’t, for instance, be able to collect deposits in China’s currency, the renminbi, until 2007, which will limit their ability to finance such potentially lucrative products as mortgages and car loans. Yet Chinese banks, which make little attempt to target particular customer segments, will have to become far more savvy or risk losing their local dominance. At stake is an enormous, largely untapped market for financial services: only 1 percent of China’s consumers hold credit cards, for instance, versus 62 percent in Taiwan.

Several years of rapid economic growth and rising household incomes are putting these markets up...