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Fri, Nov 24, 2006 - Page 10 News List

Foreign banks in China given respite

FIVE YEARS TO COMPLY Foreign institutions that conform to local regulations and incorporate will potentially be able to tap into the nation's US$2 trillion in savings


Foreign banks that incorporate locally in China to access the nation's huge pool of savers will get five years to comply with tough restrictions on lending, state media said yesterday.

They will now have until December 2011 to get their total outstanding local-currency loans below 75 percent of deposits, the China Daily reported, citing unnamed sources.

"The five-year grace period is a necessity for foreign banks because their business and market share in China are still rather small and their outlets are limited," Zhang Jiuhui (張久輝), an analyst with Beijing Securities, told reporters. "Without the grace period, it would be impossible for foreign banks to carry out their practice in China."

China announced last week new regulations governing foreign banks' operations in the country, as part of its WTO commitments to open up the banking sector to global competition.

The rules, which will take effect on Dec. 11 -- the fifth anniversary of China's entry into the WTO -- place different requirements on the banks, depending on whether or not a foreign bank chooses to incorporate locally.

Banks that incorporate in China can, in theory at least, do business in the local currency with the vast majority of the nation's billion-plus potential market of retail customers.

By contrast, banks that fail to incorporate locally cannot take deposits of less than 1 million yuan (US$125,000), restricting them to China's growing but still relatively small club of millionaires.

But local incorporation also entails disadvantages as it forces banks to conform with rules applying to local players, such as the 75 percent rule.

That particular rule is not a problem for local banks who can use their well-developed branch networks to access China's 15.8 trillion yuan (US$2 trillion) of savings -- a figure the government expects to stay high.

"The savings ratio is too high but it can't be addressed overnight," People's Bank of China deputy governor Su Ning (蘇寧) told a financial conference in Beijing yesterday.

The proposed five-year grace period comes after criticism from foreign banks saying the loan-to-deposit ratio could "greatly disrupt" their business, according to the paper.

While foreign banks expanded their lending business in the local currency, especially with multinational clients, restricted branch networks have limited their ability to collect deposits.

The China Daily cited statistics showing foreign financial institutions in China had collected 114 billion yuan in deposits by the end of August, while 161 billion yuan was paid out in loans.

Until the new rules take effect, foreign lenders are only allowed to carry out yuan-dominated business with Chinese companies, not individuals. Banks can also offer foreign currency loans.

The amended rules also give a three-year grace period before foreign banks are prevented from lending over 10 percent of their capital to a single client.

"The money a locally incorporated foreign bank lends to a single client cannot exceed 10 percent of its overall capital after Dec. 1, 2009," the new rule said. "Before that, foreign banks cannot lend over 25 percent of their capital to a single client."

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