A revised administrative rule that is likely to be completed soon by China’s banking regulators will allow foreign banks to deal with renminbi retail business around the country.

 

The draft rule will need further approval from the State Council, a source who declined to be named, said yesterday.

 

Foreign banks will be encouraged to register corporations in China instead of setting up branches to deal with renminbi business in order to protect the interests of domestic depositors, according to the revised rule. The minimum registered capital of a foreign banking corporation is said to be around US$125 million.

 

"The new rule will allow foreign banks to choose a diversified presence in the country, and a foreign banking corporation registered with the local administration will enjoy much more favorable treatment than a branch of a foreign bank," the source explained.  

 

The rule is likely to identify US$125,000 as the minimum amount for foreign bank branches wanting to collect deposits from local residents' accounts while a foreign banking corporation is not likely to face restrictions and will be able to deal in all types of renminbi business. 

 

Since foreign banks will be able to deal in renminbi with local residents by the end of 2006 it's important that they are registered locally to protect the interests of domestic depositors and maintain the security of the country's financial system, said an analyst. This practice is more in line with the global system and is accessible to local supervision, he added.

 

Foreign banks, which currently deal with renminbi business in 25 cities, will be allowed to expand across the country and extend their client base from enterprises to local residents at the end of 2006 under the revised draft rule.

 

The revision is part of China's push to achieve its WTO commitment in banking, which is scheduled to open up completely to foreign capital at the end of this year.

 

The new rule will also encourage foreign banks to expand their business in China's middle and western regions. Foreign banks expanding their renminbi business in these areas will be given preference in entering the market.

 

At the end of April, 72 foreign-funded banks from 21 countries had set up 182 branches and 14 banking corporations in China. Total assets of foreign-funded banks have hit US$94.1 billion, accounting for 1.9 percent of the country's financial institutions' total banking assets.

 

A total of 101 foreign bank branches and six foreign banking corporations were dealing in renminbi business in 25 Chinese cities at the end of April.

 

However, foreign banks currently concentrate their business in the country's eastern areas such as Shanghai, Shenzhen, Beijing and Guangzhou. Shanghai has 30 percent of foreign banking institutions. 

 

"Currently the competition between Chinese banks is very intense," said Yi Xianrong, a researcher from the Chinese Academy of Social Sciences. "I don't think that allowing foreign banks to deal with renminbi business will have much impact on domestic financial sector unless foreign banks choose to cooperate with local banks, because local banks already have their nationwide networks." 

 

However, some believe that the entry of foreign banks to the sector could have a big impact on Chinese banks. The biggest pressure could be on renminbi savings as foreign banks may "siphon off" funds from local banks that have grown by an annual average of 2 trillion yuan (US$246 billion) in recent years.  

 

Shi Jiliang, former vice chairman of the China Banking Regulatory Commission, said in March it was likely that a number of the smaller banks could lose clients to foreign banks.

 

But, he added, as foreign banks normally only focused on high-end clients there wouldn't be a mass withdrawal of savings in the initial period after liberalization.

 

Chinese banks would need to improve their competitiveness by accelerating reform and improving their services to be able to withstand the impact, he said.

 

(China Daily June 21, 2006)