China is gearing up to open its financial services market in line with its WTO commitments, but analysts say the new rules are likely to fetter foreign banks' full participation in the sector.
Beijing gave the green light last week to long-awaited draft regulations on foreign lenders operating in the country, a move meant to fulfill China's promises made to the WTO when it joined in December 2001.
China's State Council or Cabinet has yet to provide specifics, but previous drafts circulated in the Chinese press point to a host of stiff conditions that are unlikely to make the sector an even playing field.
"China wants to control the opening of its banking system," said Yan Mei, a senior banking analyst at Moody's Investor Service in Hong Kong.
"Foreign banks will want to have fewer constraints, but the restrictions will be there," she said.
The earlier regulatory proposals showed that foreign banks setting up locally registered businesses would have to sink at least 1 billion yuan (US$125,000) in capital.
Banks would need additional capital of 100 million yuan for each branch, while overall lending must be kept below 75 percent of total deposits.
A statement released by the government last Thursday said that the purpose of the laws was to open the market, strengthen supervision of foreign banks and encourage the development of local banks.
Wu Yonggang, a banking analyst with Guotai Junan Securities based in Shanghai, said he expected the Cabinet had made few amendments to the regulations expected to be published ahead of Dec. 11, the fifth anniversary of China's entry into WTO.
"I don't see much change in the new draft," he said.
Foreign banks can now lend and take deposits in foreign currency and provide yuan-denominated services only to corporations in China.
On accession to the WTO, China committed itself to deregulate its banking sector to the extent that, in principle, foreign lenders can do yuan business with any client anywhere in China.
But digging beneath the surface shows that Beijing is imposing the kind of curbs Chinese banks face in breaking into overseas markets such as the US, said the former head of a Chinese bank who insisted on anonymity.
"A tit-for-tat aspect is one thing that's driving this. Out of all the Chinese banks, only Bank of China has been able to open a branch in the US," he said.
"There is bit of muscle flexing with China saying `you want to be in my market, let's talk about your market,'" he said.
Although the rules could pose problems for foreign lenders, Charlene Chu, a director at Fitch Ratings in Beijing, agreed the restrictions were not coming out of left field.
"They do impose restrictions like that in other economies around the world. The Chinese are not coming out of nowhere with these regulations," she said.
The most prohibitive stipulation in previous drafts was the minimum deposit requirement banks could take from a single customer -- set at 1 million yuan.
Such a high threshold would severely limit the ability of overseas lenders to obtain local currency deposits, forcing them to focus on the niche market of high net-worth individuals.
"That would potentially have a big impact for banks, obviously because it's cutting them out from a very large segment of the market," Chu said.
But given that the WTO regulations on foreign banks operating in China are vaguely worded, Beijing was nevertheless likely to fulfill its agreement with the global trade club.
"At the end of the day China can argue they are giving foreign banks national treatment," Chu said.
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