China plans to open its retail-banking market to foreign competition by 2007. An opportunity too good to resist? Perhaps, but foreign lenders will find retail banking in China hard going. Few of them have made material profits from the services they are currently allowed to provide,¹ and China’s uncertain regulatory environment means that retail banking may never have an entirely level playing field. Our research² suggests that outsiders could make a stronger start in retail banking if they learned to compete in the wholesale market, which is expected to open up to competition sometime between 2004 and 2007. By first entering the wholesale market, foreign banks will be able to build up their skills and brands and to acquire market knowledge while learning to cope with China’s fast-changing regulations. Early success will also help pay for the cost of entering the more lucrative retail-banking market later on.

Corporate deposit taking should be the first wholesale business that foreign banks consider. Beginning in 2004, they will be allowed to take renminbi deposits from local corporations on top of the foreign-currency deposits they can now accept. In 2001, local deposits stood at $530 billion and foreign deposits at $46...