China To Imminently Liberalise Foreign Investment And Market Access In Its Banking Sector.

 

17 January, 2018

 

 

Introduction 

 

Following recent official statements on the liberalisation of China’s financial services sectors and initiatives to improve the Chinese regulatory environment under which foreign banks and their offshore parents operate, the CBRC, on 13 December 2017, published a statement on its website on the continuing foreign investment liberalisation and market access reform in the banking sector. Although the reform needs to be accomplished through the release of formal rules, the CBRC’s statement is a welcome clarification of the reform intention and shows the regulatory impetus for specific rules to be imminently issued. 

 

Foreign investment in Chinese-funded banks 

 

The CBRC confirmed that with State Council approval, it intends to liberalise (as mentioned in the November interview given by Vice Finance Minister Zhu Guangyao – see our earlier alert) foreign investment restrictions in Chinese-funded banks and financial asset management companies, such that foreign and domestic holdings in these institutions would be subject to the same rules. It was also clarified that consistent with the current policy, the liberalisation of foreign investment restrictions does not apply to privately-owned banks (many of which have, in recent years, been incorporated by consortia of domestic investors). 

 

Following the CBRC’s statement, we expect that formal rules removing any ownership caps specifically applying to foreign investors in Chinese-funded banks and financial asset management companies will be issued shortly. We expect that whilst the 25 per cent. collective foreign ownership cap will be removed, the cap on a single investor’s shareholding for both foreign and domestic investors (currently set at 20 per cent.) will remain. We also expect the removal of the foreign ownership cap to accompany the introduction of formal limits on an investor’s total number of holdings in PRC banks (under the CBRC’s draft rules on equity investments in commercial banks published in November 2017, an investor may invest in no more than two PRC banks as major shareholder or one bank as controlling shareholder). 

 

Market access for foreign banks 

 

In addition to liberalising foreign ownership restrictions, the CBRC’s statement also outlines the future direction of reform to improve the operating environment for foreign banks in China and increase their participation in the domestic financial markets. 

 

The possible initiatives (all still at a very high level) in the CBRC’s statement include: 

 

Commercial presences: To diversify the domestic financial sector, the current options for foreign banks to establish a presence in China will be expanded (no further detail is provided). It remains to be seen if foreign banks will have new flexibility to structure new t ypes of cooperative partnership, or other onshore presence, to increase the diversity of financial institutions in China, with a possible focus on specific products (such as private banking and credit cards); this would be an important priority for China in further developing the breadth and depth of its financial system. It also appears that additional flexibility for foreign banks seeking to establish branches in China (as further detailed below) is a key part of the CBRC’s thinking. The removal of certain operational restrictions on foreign bank branches should give foreign banks more flexibility in deciding whether to use a locally incorporated bank, or a branch, to enter the China market. 

 

Facilitating and expanding foreign banks ’ business in China by: 

 

• Removal of the waiting period for foreign banks to engage in RMB business. Under the current rules, foreign banks and foreign bank branches must have conducted business in China for at least one year before making an application to the CBRC to conduct RMB business (this requirement does not apply to the other branches of a foreign bank which has established at least one branch in China having an existing RMB licence). The reform will give new entrants to the market the ability to conduct RMB business at the point of establishment in China without having to wait a year. 
• Encouraging foreign bank branches to conduct treasury bonds business. We can expect to see more foreign banks becoming active in underwriting treasury bond issues, including potentially acting as lead underwriters on deals. 
• Liberalising the RMB retail deposit requirements applicable to foreign bank branches. No further detail is provided, but it appears the intention is to remove or reduce the RMB1 million minimum threshold that applies to deposits accepted by foreign bank branches from PRC domestic nationals. This should give foreign bank branches access to a wider pool of RMB retail deposits with which to fund their RMB business. However, it is important to note that the provision of non-deposit RMB services (including loans) by foreign bank branches is still limited to PRC corporate customers. The reform gives no added benefit to the branches of locally-incorporated foreign banks (to which the RMB1 million threshold does not apply). 

 

Rule changes to foreign bank branches’ management of their operating funds and other regulatory assessments: Again, no details of the proposed changes are provided, other than the stated intention of helping foreign bank branches improve their competitive position. Key aspects of the current rules on foreign bank branches ’ operating funds management and related assessments that may constrain their growth include: 

 

• Operating funds: Foreign bank branches are subject to strict controls on the use of their operating funds, including requirements to purchase interest bearing-assets of at least six months in duration with Chinese-funded banks. The lifting of these restrictions would provide much-needed operational flexibility. It is also unclear whether the minimum level of operating funds of RMB300 million (if the branch conducts both foreign currency and RMB business) will be removed or reduced. 
• Branch assessment: Under the current rules, each foreign bank branch is required to maintain a minimum level of operating funds and risk reserves relative to RMB risk -weighted assets, and a minimum ratio of current assets to current liabilities . This contrasts with the method of measuring other requirements such as having total assets not less than total liabilities, which are assessed on a combined basis for all PRC branches of a foreign bank. 

 

Overall assessment 

 

On the whole, it is still unclear how the broad principles of the statement will, for the most part, be implemented in the forthcoming detailed rules. The statement is nonetheless a positive for the future expansion of foreign banks in the Chinese market, as it shows the government’s focus is on market access reform as well as foreign investment liberalisation. These reforms should give foreign investors in China’s banking market more options in selecting their different entry strategies, and pave the way for eventual equal treatment between foreign and domestic investors. 

 

Reference 

 

CBRC to Proactively and Steadily Open Up its Banking Sector (银监会积极稳妥推进银行业对外开放), China Banking Regulatory Commission (the “CBRC”), 13 November 2017 

 

 

For further information, please contact:

 

Jian Fang, Partner, Linklaters

jian.fang@linklaters.com