China Lifts Restrictions On Foreign Banks

by Mary Swire, Tax-News.com, Hong Kong

17 November 2006

Foreign banks operating in China will have the same preferential legal and tax treatment given to domestic banks under Chinese financial sector reforms due to go into force next month, a government spokesman has claimed.

The government announced on Wednesday that foreign banks already operating in China will be able to offer yuan-denominated services to local customers under new rules which go into effect on December 11, putting them on an equal footing with domestic banks. According to Beijing, this honours a commitment given to the World Trade Organisation that China would open its financial services markets to foreign banks.

While the reforms have been generally welcomed by the global banking industry, some experts contend that a high minimum capital threshold will mean that many banks will struggle to gain a foothold in the country's market, with only the largest banks able to compete with state-run domestic institutions, which have already established networks with thousands of branches.

Under the new rules, foreign banks that choose to incorporate locally will have to put up 1 billion yuan (US$127 million) in capital to gain full access to China's vast retail banking market. Those that do not incorporate will be restricted to taking minimum deposits of 1 million yuan - effectively barring them to all but the wealthiest Chinese residents. They will also not be permitted to take part in the bank card business.

However, the Chinese authorities argue that this will be a vast improvement on current rules, which restrict foreign banks to offering local currency services to businesses in 25 cities, while lending or deposit-taking business must be conducted in foreign currency.

"We believe that with China's ongoing development and improved financial supervision, foreign banks will have broader scope in which to develop," Song Dahan, deputy director of the Legislative Affairs Office of China's State Council, told a news conference.

The official also noted that foreign banks will continue to enjoy preferential tax treatment over their domestic rivals.

"Those foreign-funded banks that have been locally incorporated and registered in China are still foreign-funded banks, so they will enjoy preferential treatment in income tax according to Chinese law," Song said.

This will be a short-lived advantage however, with company tax reforms expected in the next two to three years harmonising the tax rate between domestic and foreign banks.

Nonetheless, several foreign banks have already expressed an interest in taking advantage of the new rules, including HSBC, Standard Bank and Citigroup.

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