What is it?
China relaxed its regulations on foreign-owned banks just over a year ago, giving them almost full access to its banking sector. Around a dozen have been quick to take advantage of these liberalising measures, but minor irritations remain.
Who dreamed it up?
China’s State Council, in co-operation with the China Banking Regulatory Commission (CBRC).
What are its main provisions?
‘Locally incorporated foreign banks’ are now, in the main, treated the same as domestic Chinese banks but ‘foreign bank branches’ are still restricted in their operations. The regulations relate to the provision by foreign banks of banking services in the local currency, the renminbi ($1 = RMB7.41). They allow foreign banks to provide local currency banking services to Chinese individuals, as well as to Chinese enterprises, foreign enterprises and foreign individuals, and throughout the country for all classes of customer. Before December 2006, such services were restricted to Chinese enterprises, foreign enterprises and foreign individuals, and only in 25 cities.
What’s in the small print?
The share capital required for a foreign bank to set up a local subsidiary is high: RMB1bn ($135m) plus RMB100m per branch. Locally incorporated foreign banks can only engage in ‘full-scope’ local currency business once they have been granted a licence by the CBRC, which takes time. They need regulatory approval to open each new branch; they cannot lend more than 75% of their overall deposits, though there is an exemption until 2011; they cannot issue payment cards; and they cannot offer certain asset management products.
Even tighter restrictions apply to foreign bank branches: they cannot take local currency deposits from Chinese individuals below RMB1m, and the share capital requirements are higher. Foreign banks still cannot own more than 20% of a Chinese bank, or 25% if the shareholding is spread across two or more foreign banks.
What does the industry say?
In the past year, 12 foreign banks have set up subsidiaries and 10 are in the application stages, according to Moody’s. Qiang Liao, a director at Standard & Poor’s in Beijing, told The Banker: “Foreign bank subsidiaries are growing very fast and will increase their market share.” But it’s not all plain sailing. Mr Liao says the size of their branch networks is restricted due to the need to get regulatory approval for every new branch opened. This is frustrating, because having a small network limits the ability to build large deposit bases.
Richard Yorke, president and chief executive of HSBC China, says it opened 19 new outlets this year. “We ended up having to get more than 800 approvals. But it is no more or less complex than in other countries. It was extremely well handled by the regulators and relatively fast.”
How much will it cost?
It is not cheap to locally incorporate, but the rewards are high.
What do the regulators say?
Song Dahan, deputy director of the legislative affairs office of the State Council, says it is necessary to restrict the range of services foreign bank branches can offer in order to protect the interests of Chinese customers. Restrictions can be avoided if banks become locally incorporated and supervised by the CBRC.
The law of unintended consequences
None apparent at present… but watch this space.
Could we live without it?
No. Global financiers want easier access to what is predicted to be the world’s biggest economy by around 2025.
Rating: 5
Rating scale: 5 = Essential4 = Useful3 = Neutral2 = Unnecessary 1 = Waste of time
