Foreign Banks in China Still Hampered by Restrictions on Deposit-taking

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The introduction of new regulations that give greater latitude to foreign banks in China are expected to impact three key areas, yet insiders say restrictions on deposit-taking operations will continue to impede their ability to compete.

Immediately following the Lunar New Year the China Banking Regulatory Commission (CBRC) issued its “Decision Concerning the Amendment of the ‘CBRC Foreign-invested Bank Licensing Item Implementation Measures'” (中国银监会关于修订<中国银监会外资银行行政许可事项实施办法>的决定).

According to the regulator the objective of the rules change is to further open the Chinese banking sector to overseas entrants by simplifying administrative procedures such as application processes, and making it more convenient for foreign banks to do business in China.

One CBRC official has said that the Decision will allow foreign banks to operate in China in accordance with the principle of “consistency for Chinese and foreign parties” (中外一致原则).

The Decision makes changes to the Implementation Measures in three key areas, the first of which is the establishment a clear legal framework for foreign banks to acquire ownership of financial institutions in China.

It provides foreign-invested banks with a firm legal basis for investing in the establishment of domestic banks or acquiring equity stakes in them, by clearly outlining licensing conditions, procedures and application materials.

This builds upon the “CBRC Office Notice Concerning Relevant Matters for Foreign-invested Banks Engaging in Certain Operations” (中国银监会办公厅关于外资银行开展部分业务有关事项的通知) that the regulator issued in March of last year, which in principle permitted foreign-invested banks to invest in domestic banking institutions.

The second key area affected by the Decision involves a sizeable reduction in licensing items and a simplification of administrative licensing procedures.

The Decision rescinds applications and approvals for four key items involving foreign banks – handling of overseas wealth management business on behalf of clients, handling of wealth management trust business on behalf of clients, securities investment fund trust operations, and the withdrawal of interest-bearing assets by liquidated foreign-invested financial institutions.

In order to further streamline the operations of foreign banks in China, the Decision also removes the requirement that legal opinions from a domestic law firm be submitted during application for bond issuance or capital supplementation instruments.

The third key area covered by the Decision is an increase in the level of consistency between the market entry requirements for domestic and foreign-invested banks, particularly with respect to licensing requirements and procedures.

The covers application procedures for new business and branches, as well as conditions for bond issuance and capital supplementation instruments, and further simplification of reviews of the qualifications of senior executives.

CBRC says the next step will be to further expand the business scope for foreign-invested banks and simplify administrative regulations.

One senior executive at a foreign-invested bank in Shanghai said to Securities Times that while CBRC’s reform measures have come more quickly than expected, foreign-invested banks operating in China are still heavily impeded by deposit-taking restrictions.

“Market entry requirements are still of secondary importance when it comes to impacts on the operations of foreign banks in China – the main impact remains restrictions on accepting deposits from domestic citizens, making it difficult to expand the economic scope of network points” said the executive.

“This leads to comparatively high capital costs for foreign-invested banks, weakening their ability to compete.

“In addition to this the balance sheets of foreign-invested banks are slightly smaller, limiting space for leveraged operations, and further creating a negative feedback cycle.

“These issues are the main reasons that over the past few years the market share of foreign-invested banks in China has gradually declined.”

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