China´s giant and rapid economic growth in the last decade has attracted wide attention from the global business community. According to official statistics , by the end of February 2004, foreign investors had actually invested 509.8 billion US dollars into China. At the same time, China´s foreign trade has also grown tremendously and as a result, China is currently the fourth largest trading country in the world. The total import and export volume of China in 2003 is more than three times that in 1995.
China´s remarkable development of trade and investment has also presented itself as a lucrative opportunity for global financial investors. The banking and financial sector will be further opened after China´s WTO accession and all foreign financial institutions in China can expect to deliver full Chinese local currency (“RMB”) services to all kinds of customers by the end of 2006. This article aims to discuss the development of China´s opening of the banking sector and outlines its legal regime on foreign financial institutions.
The opening of the banking sector is an important component of the general economic reform and opening policy of China. Before WTO accession, China had only allowed foreign financial institutions to conduct foreign currency businesses in selected Chinese cities and, on an experimental basis, to conduct RMB businesses with foreign customers in two cities, Shanghai and Shenzhen.
When joining the WTO, China made significant commitments in its WTO Accession Protocol (“Protocol”) for opening the banking sector wider to foreign participation. It agreed that the geographic and client restrictions on foreign financial institutions in China would be gradually eliminated within 5 years starting from its date of accession to the WTO, that is, by the end of 2006. In addition, China committed that the criteria it would use for granting business licences for foreign financial institutions to do businesses in China would be solely prudential and contain no economic needs test or quantitative limits on licenses. By the same deadline, all existing non-prudential measures restricting ownership, operation and legal form of foreign financial institutions, including on internal branching and licenses will be removed.
So far, two years after WTO accession, China has fully implemented all the matured commitments in the Protocol in relation to the banking sector. Specifically speaking,
(i) There are no more geographic and customer restrictions on foreign currency businesses of foreign financial institutions.
(ii) China has opened on time thirteen Chinese cities where foreign financial institutions can conduct RMB business. That is: Shanghai, Shenzhen, Tianjin, Dalian, Guangzhou, Zhuhai, qingdao, Nanjing, Wuhan, Jinan, Fuzhou, Chengdu and Chongqing.
(iii) China´s Banking Regulatory Commission (“CBRC”)  issued an announcement on 1 December 2003 allowing foreign financial institutions in China to conduct RMB businesses with Chinese enterprises in the referred 13 cities.
Looking ahead, during the last two years before the full liberalisation of the banking sector, foreign financial investors can expect that:
(iv) By the end of 2004, Kunming, Beijing and Xiamen will be opened for RMB business by foreign financial institutions;
(v) By the end of 2005, Shantou, Ningbo, Shenyang and Xi´an will be opened for the same; and
(vi) By the end of 2006, all geographic restrictions will be removed and foreign financial institutions will be allowed to provide RMB services to Chinese individuals.
Soon after the WTO accession, China´s State Council issued Regulation on the Administration of Foreign Financial Institutions of PRC (“Regulation”) that prescribes transparent and detailed legal requirements on aspects such as the establishment, operation, supervision, administration and termination of foreign financial institutions in China. One month later, the People´s Bank of China (“PBOC”), China´s Central Bank, issued the Implementation Rule of the Regulation (“Implementation Rule”) which further specifies and complements many provisions of the Regulation. These two legal documents both took effect on 1 February 2002 and give a clear legal framework for China´s regulation of foreign financial institutions.
A) Forms of Foreign Financial Institutions in China:
The Regulation defines five types of foreign financial institutions that can be established in China:
(i) Banks headquartered in China with all of their capital contributed by foreign investors (“wholly foreign owned banks”);
(ii) Branches of foreign banks in China (“branches”);
(iii) Banks incorporated in China jointly by foreign financial institutions and Chinese companies and enterprises (“joint venture banks”);
(iv) Financial companies headquartered in China with all of their capital contributed by foreign investors (“wholly foreign owned financial companies”); and
(v) Financial companies incorporated in China jointly by foreign financial institutions and Chinese companies and enterprises (“joint venture financial companies”).
Except for branches, the other four forms of foreign financial institutions are all independent legal entities in China, which means liabilities of foreign investors of these four financial institutions are limited to their respective amounts of capital investment.
B) Establishment of Foreign Financial Institutions in China
1. Minimum registered capital:
The minimum registered capital must be fully paid capital and the required amounts are as follows:
(i) RMB 300 million in freely convertible currencies for wholly foreign owned and joint venture banks;
(ii) RMB 200 million in freely convertible currencies for wholly foreign owned and joint venture financial institutions;
(iii) RMB 100 million in freely convertible currencies as the working capital of branches allocated by headquarters of the foreign banks.
However, according to the Implementation Rule, foreign financial institutions qualifying for the minimum registered capital mentioned above can only provide foreign currency services to foreign companies, individuals and foreign invested enterprises in China. For NON-foreign invested enterprises, they can only provide a very limited range of foreign currency services. They are not allowed to conduct RMB services.
Therefore, to provide foreign currency services to all kinds of customers and RMB services, the aforementioned amounts of minimum registered capital will be accordingly increased and there will be an added requirement on the proportion of RMB of the total minimum registered capital. For instance, the highest level of minimum registered capital requirement applies to foreign financial institutions wishing to provide FULL foreign currency services and FULL RMB services to ALL kinds of customers. In that case, the minimum registered capital requirement will be increased to:
(iv) RMB 1 billion for wholly foreign owned and joint venture banks, of which 600 million shall be paid in RMB;
(v) RMB 700 million for wholly foreign owned and joint venture financial institutions, of which 400 million shall be paid in RMB;
(vi) RMB 600 million for branches of foreign banks in China as the working capital, of which 400 million shall be paid in RMB.
2. Requirements on applicants:
The Regulation and the Implementation Rules set up detailed requirements on the qualifications the applicants must fulfil. Some are common for all kinds of foreign financial institutions and these are:
(i) All applications must be financial institutions;
(ii) Home countries or regions of the applicants must have sound financial supervision and regulation systems and the applicants be under the effective supervision thereof;
(iii) Relevant authorities of the home countries or regions of the applicants agree the application;
(iv) The applicants have reasonable management structure, solid risk management systems, sound internal control schemes, effective management information systems, efficient anti money laundering measures and are clear from records of severe illegal or wrongful activities.
In addition, depending on the specific form of the foreign financial institution, the applicants must have:
(v) For wholly foreign owned banks and financial companies:
a. For wholly foreign owned banks, the only or the biggest investor must be a commercial bank whose capital ratio must be no lower than 8%; for wholly foreign owned financial companies, the only or the biggest investor must be a commercial bank whose capital ratio must be no lower than 8% or a financial company;
b. The only or the biggest investor must have set up a representative office in China at least TWO years before the year of application;
c. The total assets of the only or the biggest investor at the end of the last accounting year before the year of application shall be not less than USD 10 billion .
(vi) For branches of foreign banks in China:
a. The applicant must have set up a representative office in China at least TWO years before the year of application;
b. The total assets of the applicant at the end of the last accounting year before the year of application should be no less than USD 20 billion and its capital ratio shall be no less than 8%;
(vii) For joint venture banks and financial companies:
a. For joint venture banks, the only or the biggest foreign investor must be a commercial bank whose capital ratio must be no lower than 8%; for joint venture financial companies, the only or the biggest foreign investor must be a commercial bank whose capital ratio must be no lower than 8% or a financial company;
b. The only or the biggest foreign investor must have set up a representative office in China before the year of application;
c. The total assets of the only or the biggest foreign investor at the end of the last accounting year before the year of application should be not less than USD 10 billion;
The primary interest for foreign banks investing in China lies in the conduct of RMB businesses with Chinese enterprises and individuals. However, it can be seen from the above that it is not easy to fulfil the minimum registered capital requirements and other prudential requirements for engaging in this business. China has exercised extreme caution in opening up the banking sector.
Nevertheless, in spite of all these obstacles, statistics show that by February 2004, 64 foreign banks from 19 countries and regions had established 209 representative offices and 192 business offices in China among which 88 business offices have been authorised to conduct RMB businesses in China. The total assets of the business offices have reached the value of USD $49.5 billion. Moreover, the businesses of foreign financial institutions have been greatly expanded in China. Up to now, four foreign banks having obtained authorisation from the CBRC to provide RMB services to Chinese enterprises, namely, they are HSBC Shanghai Branch, Mizuho Corporate Bank Shanghai Branch, Citibank Shanghai Branch and the Bank of East Asia Shanghai Branch.
Therefore, it is reasonable to believe that by the end of 2006 after the expiry of the five-year deadline for the full liberalisation of the banking sector, with its vast domestic market of over 1 billion potential customers and the growing economy, China will truly become a great business opportunity for global financial institutions.