According to China's commitment at its accession to the WTO, as of December 11 this year, it will fully open renminbi business to foreign-funded banks. However, this does not mean that the 103 China branches of foreign banks that have been engaged in corporate renminbi business can directly obtain licenses for retail renminbi business, sharing the huge pie of more than 14 trillion yuan of household deposits.

On August 14, the China Banking Regulatory Commission (CBRC) sent the drafted Regulations on Administration of Foreign-Funded Banks to some foreign banks for collecting opinions. According to the draft, if foreign banks want to deal in retail renminbi business such as deposits and credit cards, they must be registered in China, being independent Chinese legal entities.

For instance, the Shanghai Branch of "XX Bank," a made-up name used to illustrate this point, means it is a branch in China of a bank registered in a foreign country. If it is changed into an independent Chinese legal entity, it will be a sole banking corporation affiliated to that foreign-funded bank, named "XX Bank (China) Co. Ltd." An anonymous official of the CBRC for supervision of foreign banks said that after widely collecting opinions of foreign-funded banks and industry insiders, it expects to formally release the regulations in the near future.

Richard Yorke, President of the Hong Kong and Shanghai Banking Corp. Ltd. (HSBC) in China, says that the bank has received the draft for opinions and is actively discussing it, but it is not convenient to release comments now. "HSBC believes that this draft is an active measure adopted by the Chinese banking regulatory authority for the long-term development of the domestic banking industry," Yorke added. A spokesperson of Citigroup in China, Wang Li, also indicated the company will actively cooperate with the CBRC. "We know that revision to the regulations is in discussion and we will do our best to support and cooperate with the new regulatory requirements," Wang said.

Enjoying national treatment

"Requiring foreign-funded banks to be registered in China creates conditions for foreign-funds banks to face the same market access conditions and standards as domestic banks," said Zhong Wei, Director of the Financial Research Center of Beijing Normal University. According to Zhong, the core of such provisions is to fulfill China's commitment to the WTO, giving foreign-funded banks national treatment.

"National treatment is reflected in the access and supervision of foreign banks. The establishment qualifications are in line with China's commitment to the WTO and we will try to adopt the same access and supervision standards between foreign-funded banks and domestic banks. But since their parent banks are in foreign countries, the supervision requirements should be a little bit different," said the CBRC in the draft regulations. Hence, the key point of revision to the regulations is to adopt universal business scope and supervision between Chinese banks and foreign-funded banks.

The draft revision abandons stipulations that the scope of regions and clients of foreign-funded banks' renminbi business shall be ratified by the People's Bank of China according to related provisions. It also commits that by the end of 2006, retail renminbi business to households will be open to foreign banks.

At present, foreign-funded banks can deal in renminbi business only with corporations. Once retail renminbi business is open to them, they can provide financial products such as mortgage loans and credit cards to common consumers.

"However, it does not mean that all foreign banks with certificates for corporate renminbi business could obtain certificates to retail renminbi business automatically at the end of 2006," said the CBRC official. As the above mentioned, the draft revision would only allow foreign banks as legal entities to issue bank cards.

The CBRC encourages foreign banks with large numbers of outlets and large volumes of deposits in China that want to add retail renminbi services to change their China branches into independent legal entities registered in China.

In accordance with the draft regulations, foreign banks can choose whether to transfer their China branches into independent Chinese legal entities according to their market positioning and business strategies. Technically, foreign banks shall establish wholly foreign-owned banks according to qualifications made by the CBRC and then include all their China branches into the newly established banks.

Zhao Xijun, Director of the Financial and Securities Institute (FSI) of Renmin University of China, pointed out that the CBRC's release of the draft revision would help curtail transnational banking supervision. That's because it has to cooperate with foreign banking regulators in supervising China branches of foreign banks, which is difficult. But for independent legal entities registered in China, CBRC can carry out complete supervision. And to foreign banks, the status of independent legal entities is beneficial for risk control of the banks themselves so that joint responsibilities can be avoided when risks occur.

High thresholds

Establishing independent legal entities first means a large increase of registered capital. According to the Law on Commercial Banks, the minimum registered capital of national commercial banks is 1 billion yuan. The draft regulations adopt the same standard: The minimum registered capital of foreign banks as legal entities is 1 billion yuan and the minimum operating fund of their branches is 100 million yuan. At present, the operating fund of China branches of foreign banks is 200 million yuan for dealing in overall foreign exchange businesses and 300 million yuan for dealing in both foreign exchange and renminbi businesses.

Many foreign-funded banks, such as Standard Chartered, Citibank and HSBC, deem that this standard is not high compared to the two substantial advantages of retail renminbi business and being able to issue bankcards independently. However, to establish companies in China, they have to transfer funds from abroad and may lose the capability of conveniently mobilizing funds and the goodwill of their parent companies. Moreover, they may face higher actual tax rates. At present, China branches of foreign-funded banks enjoy a preferential income tax rate of 15 percent as well as other favorable tax policies while Chinese banks are taxed at a 33 percent corporate income tax rate.

The new regulations allow foreign banks as independent legal entities to be engaged in renminbi business, but also set high standards, such as allowing them to absorb time deposits from Chinese households above 1 million yuan. At the same time, if foreign banks as legal entities want to obtain certificates to engage renminbi business for the first time, they must satisfy the requirements of being established for three years and being profitable for two consecutive years. "Although the standards have been lowered in the recent years, they are still the strictest ones in the world," said Stephen Green, senior economist at Standard Chartered.

According to Zhao Xijun, the requirement of transferring branches of foreign banks into independent legal entities may facilitate implementation of future deposit insurance plans in China. In fact, foreign-funded banks can participate in the deposit insurance plan and then protect interests of depositors only when they become independent legal entities in China.

Currently, many foreign banks are preparing to register in China. "Hang Seng Bank has received the related draft," said Johnson Fu, Head of China Business of Hang Seng Bank. "We have met the qualifications of registering subsidiaries in the Chinese mainland and if needed, we will consider doing so."

Chan Kay-Cheung, Executive Director of Bank of East Asia, indicates that the bank intends to register its branches in the Chinese mainland as its wholly owned subsidiaries, which will help the bank's development. Moreover, Bank of East Asia also plans to list its future subsidiaries on the mainland security market.

Although HSBC has not replied regarding the draft, Richard Yorke still holds that renminbi business is an important field of the bank's business in the Chinese mainland. Further, in order to meet the demand of renminbi business opened to foreign banks at the end of this year, HSBC has strengthened input in personnel and network construction. It will recruit 1,000 new employees each year in 2006 and 2007 and the number of outlets will increase from the present 24 to 30 by the end of this year.