Foreign Banks Open Local Units In China

by Mary Swire, for LawAndTax-News.com, Hong Kong

25 April 2007

After receiving Chinese local banking licences, four foreign banks, HSBC Holdings, Citigroup, Standard Chartered and Bank of East Asia, this week opened retail banking outlets in Beijing, Shanghai and Shenzhen among other cities.

With local licences from the China Banking Regulatory Commission, the banks are able to offer yuan-denominated services without the high limits which had previously restricted them to the top slice of the market.

Previously, the banks operated only through branches, and had been able to offer restricted yuan-denominated services since last December, when China opened its banking market as required under its WTO accession agreement.

There were already more than 70 foreign banks in China prior to last December, but most of them were limited to handling foreign currency business, and they hold just 2% of the country's banking assets. During the last few years the Chinese authorities have been racing to clean up major domestic banks, which were weighed down with bad debts and clunky administration. Most of the top mainland banks have successfully strengthened their balance sheets with IPO's, most recently and notably Industrial and Commercial Bank of China, which raised $21.2 billion with an initial public offering in October in Hong Kong and Shanghai.

There are still obstacles to the growth of foreign banks in China, however, including a 25% limit on foreign ownership of an existing Chinese bank. New entrants to the market now have to incorporate in China as wholly-owned banks or joint venture banks.

The new Regulations allow a fairly wide range of activities to wholly-owned and joint venture banks, including the issue of credit cards; but this is now not allowed to branches, although they were previously permitted to engage issue cards under 2001 rules which have now been replaced.

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