Hearing on The China-WTO Agreement and Financial Services

Prepared Testimony Mr. Robert P. Morrow III
Managing Director and Group Executive
International Corporate Banking Group
Bank of America Corporation
on behalf of the Financial Services Roundtable

9:00 a.m., Tuesday, May 9, 2000

My name is Robert P. Morrow III and I am Managing Director and Group Executive for the International Corporate Banking Group of the Bank of America. I am pleased to have the opportunity today to speak on behalf of The Financial Services Roundtable. Bank of America is one of approximately 100 financial institutions that are members of the Roundtable. Bank of America holds $650 billion in assets, has offices in 37 countries and conducts business in 190 countries. We also have retail branches in 21 states and the District of Columbia and corporate banking offices in 48 states. We are also the largest internet bank in the world, with over 2.1 million on-line customers.

My responsibilities at Bank of America include overseeing all of the bank's international wholesale banking activities, including our activities in China. I have over 25 years of experience in the global banking industry, and have managed Bank of America's Asia-Pacific and Europe, Middle East and Africa wholesale operations, as well as our domestic Corporate Banking Group.

The Financial Services Roundtable is a national association whose membership is reserved for 100 companies selected from the nation's 150 largest integrated financial services firms. The member companies of the Roundtable engage in wide range of financial activities, including banking, securities, insurance, and other financial service activities. The mission of the Roundtable is: to be the premier forum in which leaders of the U.S. financial services industry determine and influence the most critical public policy issues that shape a vibrant, competitive marketplace and a growing national economy; to promote the interests of member companies in federal legislative, regulatory and judicial forums; and to effectively communicate the benefits of competitive and integrated financial services to the American public. The Roundtable is a CEO-driven association that advocates the interests of integrated financial institutions primarily in the Congress, the federal agencies, and federal courts.

First, I would like to thank Chairman Gramm and Ranking Member Sarbanes for holding this important hearing and inviting the Roundtable to testify. The Roundtable strongly supports extending Permanent Normal Trade Relations to China. Passing this historic legislation, which is necessary for the United States to glean the benefits of China's accession to the World Trade Organization (WTO), will provide unprecedented benefit for financial services firms.

Although Bank of America is a diversified financial services firm, undertaking banking, securities and insurance activities on a global basis, I have been asked to confine my comments today on the benefits to the banking industry. I will defer to my fellow panelists for explanations of the benefits for U.S. firms engaged in insurance and securities businesses.

Today, Bank of America's operations include activities in Hong Kong, the People's Republic of China (PRC) and Taiwan. We have operated in Hong Kong since 1959, Taiwan since 1965 and the PRC since 1981. It is interesting to note that we opened our office in Shanghai in 1949, only to close it shortly thereafter for obvious reasons.

At present we employ approximately 1600 associates in these markets, of which 75 are directly involved with the PRC, where we operate full branches in Beijing, Shanghai and Guangzhou. Through these facilities we service a range of clients including multinational corporations, local corporate and financial institutions. With the exception of Hong Kong, product offerings are directed at corporate and investment banking clients. In Hong Kong we operate a highly successful retail banking practice as well as wholesale activities. Let me stress that Bank of America's experience in Hong Kong, Taiwan and the PRC is quite different. We find current legal and regulatory practices in the PRC to be significantly more restrictive, limiting our ability to service clients and expand our franchise.

Since the focus of today's session is on the PRC, my future comments will apply primarily to activities in mainland China, and not to those in Hong Kong and Taiwan.

Let me take a moment to discuss the banking provisions included in the bilateral agreement. Under the agreement, China must allow branching, provide national treatment for all newly permitted activities, and impose licensing conditions based solely on prudential grounds. We will be permitted to provide foreign exchange services to all banks and businesses, both local and foreign, as well as to Chinese individuals upon accession.

Banks will be allowed to engage in local currency business with foreign businesses immediately, with Chinese businesses starting after two years and with Chinese individuals at five years. Banking in local currencies will be phased-in, with no geographic restrictions by the fifth year after accession. Under current rules, most U.S. banks may only do wholesale business in foreign currency, and even then, only to foreign companies, with limited exceptions. While Bank of America and Citibank do have licenses to provide some local currency transactions, we are permitted to do so only in and around Shanghai.

Currently, the People's Bank of China (PBOC) often requires separate licenses to offer specific products in specific regions. This licensing process can take many years and licenses are often granted to foreign banks to achieve a geographic balance. Under this agreement, a branch in one region will be able to offer permitted products in all other regions without additional licenses and non-prudential, non-business licensing criteria (so-called economic needs testing) will be eliminated.

Let me also talk about specific products and services that will be available for U.S. firms. China will allow foreign non-bank financial services companies to provide auto financing immediately upon accession. Foreign firms will be permitted to issue business credit cards for local currency transactions and wholesale mortgages within two years of accession. This will be extended to consumer credit cards and consumer finance within five years. Currently, all of these financial services are not permitted for non-Chinese firms. In fact, five years from accession, foreign banks will be able to offer any product currently offered by Chinese banks to anyone in the country. Commercial leasing is currently not permitted for any entity, Chinese or foreign. However, it will be allowed for U.S. and foreign firms once it becomes a legally permissible activity for Chinese institutions.

These commitments are so good that they constitute a new and quite high benchmark for all subsequent accession agreements. More importantly, the agreement will be a useful tool in soliciting better commitments in financial services from existing WTO members -- especially from other developing countries -- in the on-going services negotiations. Since China is one of the few countries to actually make new commitments with a set implementation schedule, it has validated this approach to countries that were reluctant to do so in the 1997 financial services negotiations.

Next, let me turn to some indirect benefits that will accrue even to U.S. banks that do not have operations in China.

For example, U.S. banks that provide export credits, trade finance, and foreign exchange products to U.S. companies that export to China will benefit. This benefit will occur as tariff levels decline from an average 24.6% to 9.4% on all industrial goods five years after accession. Bank of America is among the top U.S. trade banks, serving both large and medium-sized companies.

U.S. banks that lend to the U.S. agricultural sector will benefit as tariffs fall on agricultural products from an average 31.5% to 14.5% on U.S. priority products and 17% on all agricultural products four years from accession (many will fall upon accession) and with the elimination of all China's export subsidies to foreign markets. The United States Department of Agriculture estimates that farm exports would grow by $2.2 billion a year. Bank of America is the largest U.S. bank lender to agribusinesses.

U.S. banks that lend to small businesses will benefit, since 80% of U.S. exporters to China are small and medium-sized businesses.

U.S. banks that lend to U.S. high technology companies will benefit since China's agreement to sign the Information Technology Agreement (ITA) obligates it to lower tariffs on electronic products from an average 13.3% to 0 within five years.

U.S. banks that lend to the auto industry will especially benefit as tariffs decline from an average 80-100% to 25% by July 2006 and quotas are progressively eliminated over that period.

Let me also address one other point. Granting PNTR to China will improve the rule of law. As Martin Lee, the leader of Hong Kong's Democratic Party has argued:

"[T]he participation of China in the WTO would not only have economic benefits, but would also serve to bolster those in China who understand that the country must embrace the rule of law."

The rule of law is important for several obvious reasons but for purposes of this hearing let me state that strengthening the rule of law is necessary to undertake commerce. Implementation of the accession agreement will necessitate the development of a transparent financial regulatory system and hasten the completion of the financial sector reforms recently begun by Zhu Rongji.

Finally, it has been pointed out by numerous sources, but it is worth bringing up again, that this is a win-win deal for American business. The concessions that I have just pointed out, and the additional concessions by the Chinese government to other industries, are unilateral. The only action that the U.S. must take is to grant Permanent Normal Trade Relations status to China. Additionally, China will receive the benefits of freer trade regardless of whether the U.S. takes this important step. China's accession to the WTO is virtually guaranteed. The only question is whether or not U.S. financial services firms and other business will be allowed to benefit from the opening of China's markets. There are over 50 foreign banks with branch licenses in the PRC today, if the PNTR vote is postponed or lost, our European and Japanese competitors will certainly seize every opportunity to leverage their new powers to our disadvantage.

Chairman Gramm, Ranking Member Sarbanes, in conclusion, the Roundtable appreciates the opportunity to provide our comments on this historic agreement and urges Congress to extend Permanent Normal Trade Relations to China. Thank you again for this opportunity and I would be pleased to answer any questions that the Committee might have on this issue.

For additional information, please contact Lisa McGreevy, Director of Government and Public Relations at the Financial Services Roundtable, 805 15th Street, NW Suite 600, Washington, DC 20005, Phone: (202) 289-4322, Fax (202) 289-1903.

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