China announce new rules for foreign banks

The Chinese government announced on November 16, 2006 that it wants to lift the restrictions to allow foreign banks to enter its retail banking market. The rules are proposed to take effect from December 11, thus fulfilling its World Trade Organisation pledge to fully open its banking sector to foreign banks.

Accordingly, foreign banks can now offer services in China's local currency, the Yuan. But they must be incorporated locally. The foreign bank must comply with putting up 1 billion yuan (US$120 million) for the incorporated bank and set aside 100 million yuan (US$12 million) for each branch. They must meet capital adequacy requirements and have effective anti-money laundering systems. The banks must have been profitable for two consecutive years and have been open for business in China for at least three years prior to applying for a license. They also must have $10 billion in assets.

Other banks will not be able to engage in bank card business or take deposits smaller than 1 million yuan from Chinese residents. Further, a branch of an overseas bank that does not incorporate locally must have non-callable capital of 200 million yuan, 30 percent of which must be in the form of interest-bearing assets. Such a branch's operating capital plus reserves must be at least 8 percent of its risk assets, a ratio that regulators may increase if they identify high risk assets and weak risk management.

With this move, larger foreign banks who decide to incorporated locally will get new avenues of growth, but competitive advantage of smaller foreign banks will be affected.

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