HONG KONG Sitting in his well-appointed office in the Bank of America Tower here, Harry Garschagen looks furstrated as he talks about his company's lack of access to the booming Chinese market to the north.

As the bank's area general manager, Mr. Garschagen is obsessed with the idea of making inroads into what is arguably the most important growth market of this decade.

"We'll continue to push the expansion button as fast and as hard as we can," he declares.

And with good reason. With more than 1.1 billion people, China already rates as the world's third-largest economy in terms of purchasing power. With annual gross national product growth expected to continue in the 10% range, it may pass Japan within a few years.

Money Flowing into China

Foreign companies have caught the bug. Last year, more than $25.7 billion in foreign investment flowed into the country, while commitments for an additional $110 billion were made.

At the same time, China has been on a buying hinge, collecting airplanes and industrial hardware faster than any other country. In 1993, trade finance agreements in China totaled more than $200 billion.

Today, the once-poor streets of Shanghai and Guangzhou are crammed with BMWs and welldressed businessmen talking on cellular phones. The government is spending like crazy on infrastructure, while big foreign joint ventures, led by American Telephone and Telegraph Co. and General Electric, are being established as quickly as they can be registered.

"Banks have to follow their customers, and... China is the competitive ground on which the game of world market share will be decided for almost every sector that's of vital importance to American industry," says William Overholt, managing director of Bankers Trust Co. in Hong Kong.

"Ws the world's biggest aircraft market. It's the world's biggest market for telephone lines. It's the biggest market for power plants. Coke and Pepsi see most of their profit growth for the next generation coming out of China. Avon, Proctor & Gamble, and Motorola are going to find their futures largely defined by what happens in China.

"This is the battlefield," says Mr. Overholt, who recently authored a book, "The Rise of China: How Economic Reform is Creating a New Superpower." "All these big firms - and some not-so-big firms - are going to pull their banks with them, and tell them to put up or shut up."

Why, then, is Mr. Garschagen so frustrated? Largely because a cautious government in Beijing, committed as it is to opening its financial markets, moves only on its own terms and timetable. The result is a number of structural roadblocks that keep U.S. banks from doing much of what they'd like in China.

Two roadblocks stand out above the rest.' Foreign banks are not yet allowed to do business in the local currency, the renminbi; and, they are permitted only limited physical presence in a country that is roughly the same size as the United States, but lacks its communications and transportation infrastructure.

"We have all these clients, and we can't do anything for them except in foreign currency," Mr. Garschagen laments.

Lack of Commitment Seen

But as Americans criticize the slow pace of change in China, Chinese m Hong Kong say American banks have been just as slow to make a commitment to the Country.

Although major U.S. merchant banks. such as Goldman Sachs & Co., have expanded aggressively, retail banks have been dragging their feet, says David Li, chief executive of Hong Kong-based Bank of East Asia.

"Once they make a commitment, I think they can be strong competitors," Mr. Li says. "But now they are not, because they haven't really devoted the resources."

Antony Leung, director of North Asia investments for Citibank, agrees. "American banks ... are always a year or two behind. They only detect a trend after it clearly becomes a trend, and is already on its way out," he says. "Luckily, this upturn is going to be so big that, while they are !ate, it is not over. There is still room to grow."

Citibank predecessor International Banking Corp. became the first U.S. bank on Chinese soil when it opened a Beijing outlet in 1902.

The Communist takeover in 1949 forced all American banks out. But shortly after President Richard Nixon's historic visit to Beijing in 1972, several established correspondent banking relationships with the Bank of China.

In 1978, First Chicago opened a representative office in China after dramatically severing its ties with the nationalist Chinese government on Taiwan.

Washington Seen as Hindrance

Today, U.S. banks arc increasing their exposure in China. Bankers charge that their business is hampered more by Washington than by their own inertia. Each May, Congress and the president engage in a debate over whether to renew China's most-favored-nation trading status in the face of human rights abuses.

"We compete with the constant risk that Washington is going to pull the rug out from under us," Mr. Overholt says. "The Japanese and Europeans don't have to live with that risk."

There are other hazards, too, which make bankers cautious in the Middle Kingdom. Inflation is running at more than 30% in major cities, leading to fears that the government will attempt to cool the economy by canceling. projects.

Accurate financial statements are difficult to come by, forcing foreign banks to rely heavily on state guarantees to back many of their loans.

'Dam Is Going to Break'

"Until we get through the current inflation cycle, most of the international banks will continue to insist on guarantees," Mr. Overholt says. "But once they get through it, the dam is going to break, and foreign banks are going to have to get down in the mud and evaluate the credit worthiness of individual Chinese companies."

In anticipation of that moment, both Moody's Investors Service and Standard & Poor's have recently begun rating some Chinese firms.

Political stability is another concern. Deng Xiao Ping, China's supreme leader, is expected to die soon. And while most of the Chinese leadership appears committed to staying the course on economic reform, the exact direction of a post-Deng leadership is far from certain.

Mr. Deng's term hasn't been perfect: In the aftermath of the Tiananmen Square massacre in 1989, business temporarily slowed to a trickle.

U.S. bankers address such political risk by hedging on the cost side, keeping employment levels and overhead at a bare minimum.

"We ask how much we can afford to lose in China when everything can go wrong does go wrong, and then go from there," says Harry Wilkinson, regional manager for Chemical Bank.

Communication Problems

Infrastructure, while presenting tremendous business opportunities, is a hindrance in dayto-day business. Technically, having a branch in one city means you can do business anywhere in the country. But in reality, poor communication and transportation linkages make it difficult to serve customers outside of a 100-mile radius.

In part because of pressure from Treasury Secretary Lloyd Bentsen, the Chinese government recently announced it will conduct an "experiment," possibly by the end of this year, allowing two or three foreign banks to do limited business in renminbi.

Those slots are highly coveted, and the competition promises to be fierce. The criteria to be used for awarding the slots is subjective. and each of the American banks now in China claims special government ties that they believe will get them the nod.

More pressing is the issue of convertibility. At present, renminbi are not traded on world currency markets. But China is in the midst of landmark fiscal and banking reforms - including the creation of a true central bank - that will eventually place the currency in play.

In April, an interbank foreign exchange trading center opened in Shanghai.

Proceeding with Caution

But the Chinese are moving cautiously, and it could be anywhere from a year to a decade before full convertibility is achieved.

While U.S. Banks wait, a handful of them are aggressively carving out profitable foreign currency niches in what is a relatively untouched market.

Correspondent banking trade finance, and bankrolling infrastructure projects top the list. But commodity trading, foreign exchange, and a surprisingly strong derivatives market are also part of the landscape.

Total U.S. bank exposure in China is difficult to gauge, but is estimated in the low 11 digits.

The niches usually fall in line with each bank's traditional strengths. Chase Manhattan Bank, for example, is heavily involved in project finance, such as power plants. First Chicago focuses on trade finance - sometimes backed by Export-Import Bank guarantees - with U.S. customers. Bankers Trust and Chemical are big derivatives players.

Bank of America and Citibank are the most active U.S. banks in China. Each operates two branches, which provide basic commercial banking services - in foreign currency - and are extremely active lenders.

Mr. Garschagen says that Bank of America gets more unsolicited proposals than it knows what to do with. "There is such an incredible amount of business out there, our biggest problem is figuring out what we want to be involved in.

"We try to limit ourselves to projects that are clearly essential to China's development," Mr. Garschagen adds.

Citibank is the only bank with a clearly stated desire to pursue consumer banking in China.

Still, nobody really knows where the greatest long-term promise lies. That, combined with a lack of reliable information, has everyone peeking over the other guy's shoulder, trying to figure out the best opportunities.

"We all think we have a. strategy that makes sense. But we're watching each other very carefully," explains Richard Mounce, general manager for Chase Manhattan.

With the exception of Citibank, which recently moved its China headquarters to Shanghai, all the American banks run their China operations out of Hong Kong. In this fast-paced British colony, which will be turned over to Chinese rule in 1997, rumors and gossip move quickly.

"Everybody's trying to find data and information that will lead them to make the right decision about the next step," Mr. Mounce says.

Financing for Growth

U.S. bankers agree that trade, foreign investment and infrastructure spending will continue at a strong pace. More significantly, they say, China's growth - unlike previous efforts in smaller Asian countries - will be financed largely by foreign investment, not domestic debt.

"These are numbers the world has never seen before," Mr, Overholt says. "Those other countries kept foreign investors out, but China absolutely needs them to survive."

The most conservative estimates place infrastructure spending between now and the end of the century at $1 trillion. Some estimates are as high as $2.5 trillion.

"If there's going to be $1 trillion in investment by the year 2000, then any single bank would represent just a drop in the bucket," says Citibank's Mr. Leung. "There will be enough for everybody."

Mr. Engen, a 1993 Freedom Forum fellow in Asian studies, is a freelance writer living in Minneapoils.

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