Foreign lenders, which are waiting anxiously to enter China's lucrative retail banking market, should first learn to compete in the wholesale banking sector, according to McKinsey & Co.

The management consulting firm said that overseas banks could make a stronger start in retail banking if they have already competed in China's wholesale market, which is expected to open up to com-petition between 2004 and 2007.

"By entering the wholesale market, foreign banks will be able to build up their brands, acquire market knowledge, and learn to cope with China's fast-changing regulations," said McKinsey in its recent report named "Nudging Open China's Retail banks."

At present, overseas banks can conduct foreign currency business for local individual and corporate customers and all currency business for expatriates.

China has pledged to allow foreign banks to take renminbi deposits from local corporations from 2004 as part of its market-opening commitment when it joined the World Trade Organization.

McKinsey also listed foreign banks' highly developed skills and international networks as advantages that would help them attract Chinese corporate clients.

"Foreign players will be able to use the deposits from corporate clients to finance their entry into other markets, such as the retail market," said the report.

Corporate deposits are expected to grow at an annual rate of about 18 percent until 2010, much faster than the growth in the economy, said the report.

Currently, the big four state-owned commercial banks - the Industrial and Commercial Bank of China, Bank of China, China Construction Bank and the Agricultural Bank of China - dominate the domestic corporate deposit sector with a 70-percent market share.

The outstanding value of both renminbi and foreign exchange-denominated bank deposits reached 21.5 trillion yuan (US$2.59 trillion) on China's mainland at the end of September, a year-on-year rise of 21.7 percent, according to the People's Bank of China.

It suggests that overseas bankers should provide loans and value-added fee-based services to small- and mid-sized enterprises on China's mainland as the next step.

The consulting firm also estimates the revenue from combined interest earned by Chinese banks will grow to more than US$20 billion annually by 2010 based on income of about US$6 billion with interest margins of 1 to 1.5 percent they generated in 2001.

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