Macau has now entered a transitional period, In 1999 China will resume its sovereignty power over Macau. The Basic Law of Macau stipulates that Macau can retain its capitalist system for at least 50 years1 . This is based on the concept of "one country , two systems" introduced by Deng Xiaoping. However, the reality of this concept is still to be tested after 1999 . The growing importance of the China factor can be seen as 1999 approaches. As far as the local banking industry is concerned, the following phenomena can be observed : 1 . The increasing linkages of financial activities between Macau and China . Increased economic activity is the main factor for the linkages of financial activities. China has gradually opened its financial market to the outside by allowing foreign banks to operate in China. BNU and Standard Chartered Bank both have a branch in Zhuhai Special Economic Zone, Luso International Banking Limited has a representative office in the same district. On the other hand, Guangdong Development Bank (Macau Branch) was granted a commercial banking licence by AMCM and has operated since 1993 . (1.Basic Law of MSAR, chapter one, article No. 5 . 2. The increasing role played by the Bank of China Group in Local economic development . In 1995, BOC, the biggest commercial bank in Macau, will issue bank—notes for Macau1 . The BOC group also partially finance important public projects such as the Macau Airport . 3 . The impact of the New Financial System Act The new Act will upgrade Macau Banking Supervision to reach international standard . It can help banks in Macau to emerge stronger and healthier than before . It will facilitate the diversification of the Macau Financial System. The implementing of the risk—base capital guidelines proposed by the Basle Committee on Banking Supervision , i . e . the 8% capital adequacy ratio, will affect the current banking strategies . 4 . The scheduled deregulation of deposit interest rate and disclosure of information of Hong Kong banking system. The abandonment of interest rate agreement In 1995 means banks can freely offer deposits interest rate to their customers. Hence will end up in higher costs of funds because of price competition among banks. The disclosure of information requires banks to disclose their inner reserves and their annual profits, hence avoiding banks to manipulate their business results. Since Macau banking system is closely tied with Hong Kong's, the impact of these changes will also affect banks in Macau . ( 1.BNü & BOC will issue bank note for Macau on an equal proportion to 2010 . The abandonment of interest rate agreement In 1995 means banks can freely offer deposits interest rate to their customers. Hence will end up in higher costs of funds because of price competition among banks. The disclosure of information requires banks to disclose their inner reserves and their annual profits, hence avoiding banks to manipulate their business results. Since Macau banking system is closely tied with Hong Kong's, the impact of these changes will also affect banks in Macau 5. There is an increasing trend of Industry Concentration The industry leaders, Bank of China, Macau Branch ( BOC) and Banco Tai Fung (BTF) have emerged stronger and stronger in recent years . BNU is losing market share significantly . Those branches of overseas banks showed no sign of improvement in market share since the date when they started business in Macau. If this trend is continued, in the future, the banking industry will be dominated by a few banks especially by those Chinese banks with strong retail base. (Industry concentration will be discussed later) . The above phenomena imply that in future , the local banking industry will undergo a structural change. What is important for banking practitioners is whether the change will make the industry more or less attractive. 1 (1.The strength of the five competitive forces (porter, 1980) work together to determine the intensity of industry competition and profitability. An industry is attractive when the five forces work favorably toward itself. Porter 's model will be discussed in Part Two. OBJECTIVES OF THE THESIS The main objectives of this thesis are: 1 . Perform an industry analysis of Macau Banking Industry. 2 . Identify the factors that cause structural changes and anticipate the future structure of the Macau Banking Industry. 3 . Recommend the best strategies for Macau banks to cope with the changes . The thesis is organized into four parts . Part one provides a background information of the banking industry, topics discussed include: 1 . Overview of Macau Banking Industry 2 . Banking and Monetary Policies of Macau 3 . Characteristics of Macau Banking Industry 4 . Regulatory Framework of the Macau Banking Industry 5 .Economic Environment of the Macau Banking Industry Part two analysis the competitive environment of the Macau Banking Industry using Michael Porter' s ( 1980) model and the financial business matrix introduced by George M. Bollenbacher . Topic discussed are: 1 . Threat of Entry 2 . Bargaining Power of Buyers 3 . Bargaining Power of Supplier 4 . Threat of Substitute Products 5 . Rivalry Among Existing Firms Part three discusses the important evolution process that causes structural changes and how they can affect Macau Banking Industry. Topic analysis are: 1 . Long-run changes in growth 2 . Demand trend in banking services 3 . The increasing customers knowledge about banking products 4 . Trends in banking business strategies . 5 . Structural change in adjacent industries . 6 . Changes in Government Policy . 7 .Entry and Exit. Part four will present the six winning strategies for banks to cope with the changing environment .