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Foreign Banks Now Permitted To Open Up In China

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

14 December 2006


Hong Kong's Bank of East Asia and Hang Seng Bank are among eight foreign banks which have applied for retail banking licenses in mainland China as the country this week opens its banking market under WTO rules it agreed five years ago.

There are more than 70 foreign banks in China already, but until now 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.

The other banks which have applied for retail licenses are Citigroup, Mizuho Corporate Bank, HSBC, ABN Amro and DBS Bank. Many of these banks have already taken stakes in mainland banks and created financial infrastructure to be ready for this moment.

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 have to incorporate in China as wholly-owned banks or joint venture banks. Few international banks have done this; to date, they have mostly operated through branches, which are not covered by the new regime, or through minority holdings in Chinese banks. It is not clear whether the requirement to incorporate wholly-owned subsidiaries is in conformity with China's WTO obligations, although the minimum capital requirement of US$10bn in assets does conform.

The new Regulations allow a fairly wide range of activities to wholly-owned and joint venture banks, but disallow bank card business for branches, something they were previously permitted to engage in under 2001 rules which have now been replaced.


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