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3 April, 2017
Cooperation between foreign banks in China and their offshore affiliates encouraged
Notice of CBRC General Office on Development of Certain Business By Foreign Banks, No. 12 of 2017
Introduction
The China Banking Regulatory Commission (“CBRC”) set out, in a new notice released last Friday, a range of measures aimed at providing new business opportunities and removing regulatory requirements for foreign banks in China. The benefits (effective 10 March 2017) extend to locally incorporated banks as well as, where applicable, to foreign bank branches in China.
The new policy is expected to facilitate foreign banks’ efforts to serve corporate and retail clients in China through their international networks and cross-border expertise.
In this article, we review the key aspects of, and some areas left for consideration by, the new policy.
Key Benefit 1: Cooperation with Parent Group
CBRC’s new policy permits foreign banks in China to cooperate with their offshore affiliates in offering integrated financial services to assist clients with bond issuances, listings, mergers and acquisitions, financings and other activities outside China.
By this new measure, CBRC has provided a welcome basis for foreign banks in China to work on joint assignments with their offshore affiliates, in a manner which enables them to add value through their China operations and develop associated on-the-ground expertise.
Further clarification would be welcomed on the scope of the products and services in which foreign banks in China are permitted to cooperate with their offshore affiliates. In a press conference on the new policy, CBRC emphasised that the background of the policy is to support the “One Belt One Road” strategy and to meet the financial services needs of Chinese enterprises expanding overseas. That being said, the activities specified in the new policy are focused on M&A and corporate finance (including debt, equity and bank financing), and it is unclear whether this list is exhaustive and what, if any, additional activities are intended to be included. Arguably, supporting the needs of Chinese enterprises expanding abroad ought not to be limited to corporate finance, but also cover financial products such as funds, securities brokerage and derivatives; however, these types of offshore products have not been specified in the policy as areas where foreign banks in China may cooperate with their offshore affiliates.
Role of onshore bank vis-a-vis offshore affiliates unclear
From its press conference, CBRC views the role of foreign banks in China under the new policy as “maintaining the offshore customer relationship on a day-to-day basis, liaison and communication”. No further attempt is made to define the respective roles of the onshore and offshore banks, thus raising several questions on how the proposed cooperation is to be conducted under the PRC regulatory environment:
- Onshore banks: Will onshore banks be permitted to market the services contemplated by the new policy proactively to clients in China? To what extent can onshore banks assist with deal execution, such as due diligence in overseas listings and M&A transactions? Does the new policy permit onshore banks to provide investment banking services in some form, or would this give rise to licensing concerns under the rules of the China Securities Regulatory Commission (“CSRC”) even if the cooperation is limited to overseas assignments and offshore products?
- Offshore banks: While the scope of the cooperation under the new policy is limited to offshore products, there is no guidance on what (if any) activities the offshore affiliates of a foreign bank may conduct in China – which is needed to address the concern that significant onshore involvement in product marketing, execution or delivery by the offshore affiliates could amount to doing business in China. Offshore banks may therefore be considering relocating more of their staff to China to take advantage of the new policy (especially in light of media speculation and official comment that income tax in China may be reduced).
Reporting and filing
The notice requires greater visibility on the arrangements under which foreign banks in China cooperate with their offshore affiliates. Foreign banks are required to submit quarterly reports to CBRC on the extent of their cooperation with offshore affiliates in the past year, and must clearly define the split of roles and profit sharing between the China and offshore operations.
The notice does not provide any guidance on the licensing requirements in relation to the cooperation between a foreign bank in China and its offshore affiliates. Whether the cooperation would be seen as a form of new business carried on by the foreign bank, requiring a prior filing with CBRC before the bank could conduct the activities, is unclear.
Key Benefit 2: CBRC business licensing requirements relaxed
CBRC will permit foreign banks to undertake the following activities in China without needing to obtain licences or approvals from CBRC:
- underwriting treasury bonds;
- providing custody services (though licences, approvals and filings specifically provided in CBRC rules, such as qualification requirements to conduct funds custody business, will continue to apply); and
- providing financial and other advisory services.
While the exact scope of “other advisory services” is not defined, the removal of CBRC licensing requirements may be expected to assist foreign banks in China to develop a deeper strategic advisory business to corporate treasurers on group structures and financing solutions.
However, foreign banks will still need to comply with the licensing and approval requirements of other regulators in relation to the above activities, such as the approval of the Ministry of Finance for underwriting of treasury bonds, and CSRC approval in relation to advisory activities involving securities, futures and investment funds.
Reporting and filing
The removal of CBRC licensing requirements will shorten the time taken by foreign banks to build up their platforms in these areas. Foreign banks are instead required to submit a report to the relevant regulator within 5 business days of conducting the relevant activities.
It should be noted that under the pre-existing CBRC regulations, a foreign bank providing new products within its business scope must file a written report with CBRC or the local banking regulatory bureau within 5 days of conducting the relevant business. The report must contain a description of the product as well as key risk areas, internal controls and operating procedure. CBRC did not specify whether the reporting requirements of the new policy will replace the above provision, though it would appear that this is the intention.
Key Benefit 3: Foreign banks in China can acquire certain banking institutions
The new policy enables wholly foreign-owned and Sino-foreign joint venture banks in China to invest in other (domestic or foreign) banking entities, but not including other CBRC-regulated financial institutions such as trust companies and financial asset management companies (“Chinese Banks”).
We expect this will help international banks better manage the integration and consolidation process of a Chinese Bank acquisition (which previously could only be undertaken by the offshore affiliates of an international banking group).
While the new policy gives international banking groups more options of choosing an eligible investing entity to invest in Chinese Banks, under the current regulations it is still not possible to use a foreign bank in China to invest in other regulated financial entities in China (such as those regulated by CSRC or the China Insurance Regulatory Commission, and non-banking financial institutions regulated by CBRC).
Overall observation
In some areas (including those discussed above), further rules are needed to define how foreign banks in China can avail themselves of the new measures. That being said, the notice is a welcome development which should be of assistance to foreign banks seeking to use their international network and expertise to differentiate themselves when competing for business with established domestic banks in China. It should also enable foreign banks in China to achieve closer integration with, and play a more important role in, the activities of their offshore parent groups. Foreign banks can look to more initiatives from CBRC to assist them in expanding and deepening their product offerings in China.
Reference
Notice of China Banking Regulatory Commission General Office on Development of Certain Business by Foreign Banks (中国银监会办公厅关于外 资银行开展部分业务有关事项的通知), CBRC, 17 March 2017
For further information, please contact:
Jian Fang, Partner, Linklaters
jian.fang@linklaters.com
