As China completes its WTO commitments, new regulations should help banks expand their services
The Standard Chartered Bank, which has 20 outlets in 14 Chinese cities at present, applied to the China Banking Regulatory Commission (CBRC) to set up a China-registered subsidiary and offer renminbi business for individuals on November 16, when the Regulations on Administration of Foreign-Funded Banks were just publicized.
“We are pleased about the announcement as we are actively interested in the opportunity to locally incorporate our business in China,” Standard Chartered Bank China Chief Executive Officer Katherine Tsang said in a statement. The bank also plans to open two new sub-branches by the end of this year and double its outlets in China over the next 18 months. Some other foreign-funded banks, such as Citibank and the Hong Kong and Shanghai Banking Corp. (HSBC), also showed the same intent to apply to be locally incorporated banks.
Doors opened
After its accession to the WTO, China has faithfully honored its WTO commitments and taken a series of opening-up measures on its own initiative. According to statistics released by the CBRC, as of the end of September 2006, there were 14 wholly foreign-funded banks and joint venture banks registered in China, which opened 17 branches and sub-branches. In addition, 73 foreign banks from 22 different countries and regions established 191 branches and 61 sub-branches in 24 Chinese cities and 183 foreign banks from 41 countries and regions established 242 representative offices in 24 cities. The total renminbi and foreign currency assets of these foreign-funded banks amounted to $105.1 billion, accounting for 1.9 percent of the total banking assets in China. The total deposits amounted to $33.4 billion and the loans totaled $54.9 billion.
According to Chinese laws and regulations, Chinese branches of foreign banks, wholly foreign-funded banks and Chinese-foreign joint venture banks can, subject to approval, operate business in deposits, loans, clearing, trust services and insurance agencies. Additionally, such banks can apply to conduct renminbi business as long as they satisfy the requirements of operational periods, profitability and prudent operation. At the same time, foreign-funded banks are allowed to engage in derivatives trading, personal wealth management, offshore banking services on an agency basis (Qualified Domestic Institutional Investor) and electronic banking. The foreign-funded banks are now permitted to engage in over 100 categories of business activities. According to the CBRC statistics, by the end of September 2006, 25 Chinese cities were opened to foreign-funded banks’ renminbi business, of which five cities were opened ahead of schedule, with 111 foreign-funded banks being permitted to undertake renminbi business. Since 2001, the volume of renminbi business by foreign-funded banks has grown 4.6 times at an annual average rate of 92 percent.
A growing regulator
NOT LISTED YET: Many Chinese commercial banks choose to be listed in order to better cope with challenges after the opening of the Chinese banking sector. Agricultural Bank of China, the only unlisted among China’s four largest state-owned commercial banks, is also preparing for its IPO
In recent years, the Chinese Government has amended and promulgated a series of laws and regulations on banking institutions and their business activities. Thus, a legal framework for banking regulation and supervision has taken shape, such as the Law on Banking Regulation and Supervision, and the Regulations on Administration of Foreign-Funded Financial Institutions.
Meanwhile, the Chinese Government attaches great importance to mitigating the risks arising in the process of opening up through prudential supervision. By drawing upon international supervisory standards and best practices, China has endeavored to create a fair and transparent supervisory environment, and has made notable progress in integrating the supervisory standards and requirements for both local and foreign banks, said the CBRC in a statement. China also keeps improving its processes and procedures for the supervision of foreign-funded banks, including adopting a risk assessment system for the supervision of foreign bank branches.
New regulations
On November 16, the State Council issued the Regulations on Administration of Foreign-Funded Banks, which took effect as of December 11, the day when China was expected to fully open its banking sector to foreign competition.
According to the regulations, subsidiaries of foreign-funded banks are encouraged to become locally incorporated banks so that they can enjoy the national treatment and the CBRC can better supervise their operation. “The policy favoring Chinese corporate status complies with WTO rules, which allow its members to adopt measures of prudence when opening up the banking sector,” said Wang Zhaoxing, Assistant Chairman of the CBRC.
After they become locally incorporated banks, foreign-funded banks can issue credit cards in renminbi. The foreign-funded banks are required to have good risk management, risk control systems and information technology support systems to hedge risks in the issuance of credit cards in China.
The new regulations lift restrictions on renminbi and foreign-currency transactions by solely foreign-funded banks and Chinese-foreign joint venture banks. Chinese branches of foreign banks, however, are banned from offering renminbi services to Chinese citizens unless an individual, having obtained the approval of the banking regulatory authority, makes a fixed deposit of no less than 1 million yuan.
Foreign financial institutions with good credit are encouraged to join China’s commercial banks through share purchasing and equity participation. The introduction of foreign strategic partners into Chinese banks has played a positive role in improving their risk management, financial innovation and in enhancing their competitiveness, Wang added.
Foreign-funded banks welcome the new regulations. Richard Yorke, President of HSBC’s China operations, said the release of the regulations marked a historical milestone for China’s finance industry and also marked the fifth anniversary of China’s entry into the WTO. HSBC Group has 13 branches and 13 offices on the Chinese mainland and a new Xi’an branch will be launched before the end of this year.
Makoto Motooka, the Shanghai branch director of the Bank of Tokyo-Mitsubishi UFJ, expressed his respect for the Chinese authorities in pushing forward the opening-up of its financial sector by saying that his bank plans to promote business in China and the new regulations would provide strong support. “We hope to have the opportunity of discussing our future development with the Chinese financial authorities,” said Motooka.
Banks can hardly wait
The Citigroup consortium signed an agreement to pay 24 billion yuan for 85.59 percent of Guangdong Development Bank (GDB) shares on November 16, the same day of the release of the new regulations.
Among the six-institution consortium, Citigroup, China Life Insurance Group, the nation’s largest insurer, and State Grid, a major electricity distributor, will hold 20 percent of GDB shares respectively. The other three institutions, including IBM Credit, will hold the remaining 25.59 percent.
GDB Board Chairman Li Ruohong said the restructuring will help the bank’s development with participation of both international and domestic players. GDB President Zhang Guanghua deemed that the restructuring was not the only one of its kind in the reform and opening up of China’s finance industry. Before this deal, HSBC owned 20 percent of Bank of Communications Ltd., China’s fifth largest bank, while Bank of America has 8.52 percent of China Construction Bank, the third largest commercial bank in the country.
As China fulfills its commitments to the WTO, competition in the banking sector will sharpen. Foreign banks that previously targeted high-end customers will turn their attention to small and medium-sized enterprises, said Zhu Min, Vice Chairman of Bank of China.
The government has taken measures to open financial markets, including the introduction of foreign strategic investors, which allowed the Industrial and Commercial Bank of China to invite help from Goldman Sachs, Allianz and American Express, said Dong Tiefeng, an official with the CBRC. The reform’s ultimate goal was to transform the banks into market players with efficient and modern corporate governance, Dong continued.
“Chinese banks should improve their capital structure and provide more diverse products,” said Cao Yuanzheng, Chief Economist with Bank of China International. According to Cao, they should also pay more attention to business risks, especially in fields such as electronics and information resources sharing.
China’s WTO Commitments in the Banking Sector
1. On the issue of cross-border supplies, foreign-owned companies can make provisions and transfer financial information, financial data processing and related software via other financial service suppliers;
Advisory, intermediation and other auxiliary financial services on all activities include credit referencing and analysis, investment and portfolio research and advice, advice on acquisitions and corporate restructuring and strategies.
2. Restrictions on establishing foreign-owned banks in China
-- Geographic Coverage
For the foreign currency business, there will be no geographic restriction upon accession.
For the local currency business, the geographic restrictions will be phased out as follows: Upon the WTO accession, Shanghai, Shenzhen, Tianjin and Dalian; within one year of accession, Guangzhou, Zhuhai, Qingdao, Nanjing and Wuhan; within two years of accession, Jinan, Fuzhou, Chengdu and Chongqing; within three years of accession, Kunming, Beijing and Xiamen; within four years of accession, Shantou, Ningbo, Shenyang and Xi’an. Within five years of accession, all geographic restrictions will be removed.
Clients
For the foreign currency business, foreign financial institutions will be permitted to provide services in China without restrictions to clients upon accession.
For the local currency business, within two years of accession, foreign financial institutions will be permitted to provide services to Chinese enterprises. Within five years of accession, foreign financial institutions will be permitted to provide services to all Chinese clients. Foreign financial institutions licensed for the local currency business in one region in China may serve clients in any other region opened for such business.