The intiative of Chinese Government to open up its financial markets in 2007 seems to be a great opportunity for overseas banks. It is a wakeup call to Chinese banks to reform their internal processes. The article, discusses some of the risks and challenges faced by the Chinese banks.

Over the past few years many positive and profound changes have taken place in the China's financial sector. China's banking sector is now looking much far better, with slight modifications in the financial fundamentals and structural changes, particularly in the ownership structure. Several Chinese banks have been adopting internal reforms in the earnest.

According to the Finance and Trade Services Agreement, China has started opening up its banking sector to the foreign world in 2006. At the same time they are speeding up various financial reforms, and unprecedented changes in the competition pattern and operation in the banking sector. The underlying government assurance will no longer exist in banking and new measures about capital adequacy management will be implemented. Classified regulation based on capital adequacy will be enforced. The speeding up of interest rate marketization reform and entry of foreign capitals will further enhance competition in the banking sector. All these will foster operation efficiency in China's banking sector.

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