VII-1 Question: Since December 11, 2006, China has been fully open to foreign banks. But a constant question being asked is why China encourages foreign banks to incorporate locally? In terms of supervision over foreign banks, what principles will China follow?
A: Since December 11, 2006, China has honored its WTO commitments to opening the Chinese institutional and individual renminbi businesses to foreign banks and those banks enjoy the same treatment as their Chinese counterparts.
The reason why China encourages foreign banks to incorporate locally is totally in line with international practice, and it is imperative if those banks are going to handle comprehensive renminbi business. The supervisory departments of all countries are very careful with this issue, because local currency is closely related to the national policy and to people's lives. A common international practice is to allow locally incorporated foreign banks to operate local currency business, while branches of foreign banks cannot do such business. China adopts the same principles. If, according to their development strategy, target market, and target clients, foreign banks want to do renminbi retail and small sum renminbi businesses, they must incorporate locally. If they are not interested in small sum renminbi business, don't want to set up such big network, or their service systems cannot reach the requirement, or they only want to target institutional accounts and operate large sum renminbi business (over 1 million yuan), they can still run the banks as branches.
As for supervision, the Chinese Government will treat them the same as local banks, and the same supervisory principles apply to both domestic and foreign banks. Those principles are as follows; Locally incorporated foreign banks must retain registered renminbi capital of 1 billion yuan. The banks' capital adequacy must remain above 8 percent. Supervisory bodies will closely monitor the loan quality, operation, and allowance for bad debts, and large transactions. If any foreign bank violates the above-mentioned principles, the Chinese Government will adopt supervisory measures or order the bank to add relevant capital and risk management capital, or suspend some businesses or order it to shut down. If payment crisis does occur due to an uncontrollable event, there are still some deposit insurance and payment liquidation procedures so as to protect depositors' interest and safety to the largest extent.
As a matter of fact, banks of all countries complain about government interference and restrictions. Game theory applies to the supervisory department and those being supervised all the time. The Chinese financial industry is at a critical reform period and it is not realistic to fully open the banking industry. Any sensible government won't do that. It must be noted that if the Chinese financial system breaks down, the world economy will suffer.