Foreign Lenders Move a Step Closer to Their China Dream

* While some of the regulations amount to a relaxation of rules, others impose restrictions

(Beijing) — China’s banking regulator has fleshed out details of government plans to give foreign lenders greater access to the domestic market, laying out requirements on a range of issues, including how different entities, such as locally incorporated subsidiaries and branches, will be allowed to operate.

The draft rules, published Wednesday, form part of the revision of laws and regulations that will be necessary to allow foreign banks and other financial institutions to expand in China, fulfilling pledges made by the government in November 2017 to open up its financial sector.

Those promises were reiterated in April by Yi Gang, the governor of the People’s Bank of China, who said that foreign banks will be allowed to simultaneously set up branches and locally incorporated subsidiaries and will see a significant expansion in their scope of business.

The latest rule revisions aim to “further open up the banking industry, encourage competition, increase the risk-prevention capabilities of foreign banks and beef up the protection of consumers’ rights and interests,” the China Banking and Insurance Regulatory Commission said in its statement.

But although some of the regulations amount to a relaxation of rules, others impose restrictions. One of the key articles in the draft places limits on foreign banks’ ability to offer retail banking services, which are individual customer services such as ordinary savings accounts, mortgages, loans, and credit cards.

Under proposed changes announced earlier in 2018, foreign banks will be allowed to set up locally incorporated wholly owned subsidiaries and operate them side by side with branches that belong directly to their overseas entities. Alternatively, they can set up joint ventures with Chinese banks while simultaneously running branches that are wholly owned by their overseas entities.

Separation of business

The draft rules released Wednesday stipulate that if a foreign bank has both a locally incorporated subsidiary and branches that belong directly to their overseas entities, it will be able to offer only yuan-denominated retail banking at outlets of the locally incorporated subsidiary. If banks maintain only branches, then the branches can carry out renminbi retail banking but with a 500,000 yuan ($71,900) threshold.

The emphasis on separation is probably due to the different level of regulations on bank branches and locally incorporated subsidiaries, an executive at a joint venture bank in Shanghai told Caixin. Bank branches and locally incorporated subsidiaries have different scopes of business, and if they aren’t clearly separated, there’s a risk they will be able to do business in areas they shouldn’t, the person said.

Although Chinese regulators are promoting the new rules as a positive change for the foreign banking industry, for overseas lenders, they are only part of the difficulties and barriers to doing business in China.

“What matters to foreign banks are not only the regulations in the documents but the actual barriers they encounter in their business operations,” a banking analyst with an overseas brokerage who declined to be identified told Caixin. “What is of more concern is how quickly regulators respond to banks’ applications to set up a locally incorporated subsidiary rather than the detailed requirements of setting up the entity. Foreign banks are under much tighter scrutiny than domestic banks.”

Contact reporter Liu Jiefei (jiefeiliu@caixin.com)