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Fri, Nov 17, 2006 - Page 10 News List

Beijing defends its new rules for foreign banks

WTO COMMITMENT China says the regulations will help it meet promises to the trade body, but foreign bankers dislike the high capitalization requirements


China defended new rules allowing foreign banks into the lucrative retail banking market, with officials saying yesterday that the regulations' stringent requirements would meet Beijing's promises on opening the long-protected sector to foreign competition.

The rules, released late on Wednesday but circulated among industry executives for months, require foreign banks to incorporate locally if they want to offer local-currency services to individual Chinese.

Beyond that, foreign banks must put up 1 billion yuan (US$120 million) for the incorporated bank and set aside 100 million yuan for each branch.

The rules, which take effect on Dec. 11, are designed to fulfill one of the last commitments China made when it entered the WTO five years ago: to open its banking sector.

Foreign banking executives, however, have complained that the high capitalization and other requirements will slow their ability to set up extensive branch networks.

Officials involved in drafting the regulations rejected that criticism, saying the measures are consistent with international practice and give foreign banks equal treatment with Chinese competitors.

The requirements are "necessary to safeguard the security of China's financial system and to protect the interests of Chinese depositors," Song Dahan (宋大涵), vice minister for legislative affairs at the State Council, said at a news conference to introduce the rules.

"In a nutshell, these regulations have demonstrated the Chinese government's consistent pursuit of the opening-up policy and its seriousness in meeting WTO commitments," Song said.

For more than a decade, major foreign banks have yearned to serve ordinary Chinese, who are prodigious savers, salting away about a quarter of their incomes.

But China's commercial banking industry is notoriously weak, with mismanagement saddling them with high rates of bad loans and making the government reluctant to allow unfettered foreign competition.

Under current regulations, foreign banks can handle loans and deposits in foreign currencies, but they can provide services in the yuan only to enterprises in 25 cities. Foreign banks were allowed to run their China branches from their overseas headquarters.

The new regulations drop the geographical restrictions and allow services to ordinary Chinese as well as enterprises.

The new regime is not expected to impede global retail banking giants, such as Citigroup and HSBC Holdings, which have been setting up branches in anticipation of the opening and which have deep pockets to fund the expensive expansions, bankers and analysts said.

"We believe that local incorporation will enable us to further expand our network and service range, in particular our RMB [renminbi] financing ability, for the benefit of our customers in the China market," Richard Yorke, head of HSBC's China business, said in a statement.

However, smaller foreign banks unwilling to commit large amounts of capital, are likely to be affected.

Under the new rules, foreign banks that choose not to incorporate in China are allowed only to accept term deposits of at least 1 million yuan, effectively restricting their services to all but the wealthiest Chinese residents.

That condition, regulators suggested, went even further than the WTO required.

"This is not a restriction to some extent," Wang Zhaoxing (王兆星), assistant chairman of the China Banking Regulatory Commission, told reporters.

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