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Dealing in the People's Money
http://www.sina.com.cn 2004/09/07 11:19  Beijing Review

  Easier access for foreign banks to offer yuan transactions will supply some relief, but there are still limitations

  By LAN XINZHEN

  China’s state-banking administration has agreed to a document which will eventually lift all restrictions on individual foreign exchange transactions to Chinese citizens, in line with its promise to open the bank market upon entry into the World Trade Organization (WTO). This eliminates service limitations for foreign banks, which are now moving to an equal footing with their Chinese counterparts.

  Raymond Or, the usually stern-looking general manager of the Hong Kong and Shanghai Banking Corp. (HSBC), has been smiling since the issuance of the revised Rules for Implementing the Regulation Governing Foreign-Funded Financial Institutions in the People’s Republic of China (hereinafter referred to as the Rules). The Rules, which will be effective on September 1, simplify the examination and approval process for foreign banks to make yuan transactions.

  He expressed that at present HSBC is very confident in keeping its position as “the biggest foreign bank on the Chinese mainland,” adding that the next step HSBC will stress is building its own structure and expanding its network.

  Three Major Consequences

  The Rules, which the China Banking Regulatory Commission (CBRC) announced, have three focuses, according to Or.

  AT YOUR SERVICE: Yu Yin (left), a customer assistant of HSBC Beijing Branch, offers financial advice to a customer

  The first point is that the Rules cancel restrictions on time intervals between the opening of branches. Previous regulations say that foreign banks can only open one branch per year, but there are no such stipulations under the new Rules. This provides foreign banks much more freedom in scheduling their business expansion.

  Or announced that at the end of this year, HSBC would open new branches in the cities of Suzhou and Dongguan, as well as upgrading the representative offices in Chongqing and Chengdu to branches, which would have been impossible before the Rules.

  According to statistics from CBRC, up to now, 62 foreign banks from 19 countries and regions have established 191 operations in the country. The cancellation of the interval requirement, it is predicted, will push up the number of foreign banks operating in China greatly in the next few years.

  The second major impact of the Rules is a reduction of the operating capital foreign financial institutions are required to have to be authorized to enlarge their business scope. The minimum operating capital for yuan transactions with Chinese-funded enterprises will drop from 400 million yuan ($48.31 million) to 300 million yuan ($36.23 million). This figure will fall from 600 million yuan ($72.46 million) to 500 million yuan ($60.39 million) for foreign banks to do business with Chinese individuals.

  Yuan transaction has been one market over which foreign banks have been drooling for some time. There have been over 100 foreign-funded banking institutions approved to operate yuan transactions in China, constituting more than half of all foreign banks in the country. As of the end of June 2004, yuan assets of foreign banks in China totaled 84.4 billion ($10.19 billion), an increase of 49 percent over the same time last year.

  NEW BANNER SYSTEM: Pedestrians in Shanghai’s Pudong District passing by a row of banners with bank advertisements. Yuan assets of foreign banks in China increased 49 percent by the end of June compared with the same time last year

  Yuan transaction was first opened in Shenzhen, Shanghai, Dalian and Tianjin in December 2001. A second batch of five cities—Guangzhou, Zhuhai, Qingdao, Nanjing and Wuhan—followed one year later. In November 2003, according to WTO commitment, foreign financial institutions were allowed to extend their yuan transactions services to Jinan, Fuzhou, Chengdu and Chongqing. This December, Beijing will allow foreign banks to execute yuan transactions, along with Kunming and Xiamen. All geographic restriction on yuan transaction will be lifted by 2006, according to the Rules. Most of the 22 foreign bank branches in Beijing have expressed to the relative authorities the desire in opening yuan transactions there.

  Officials said that with more and more institutions executing yuan transactions and the places where they can operate are expanding, the sector is sure to grow rapidly.

  According to Or, the third major point of the Rules is its extensive simplification of EA that foreign banks must now endure to access the market.

  Current regulations stipulate that applicants need to deal with the local CBRC branch to establish a foreign financial institution or branch in a given place. The local CBRC branch then submits the application to the central office for examination and approval. The new Rules simplify this protracted practice by allowing applicants to submit materials directly to the main CBRC office.

  Similar indirect and inefficient approval hurdles are in place for foreign financial institutions applying to operate or expand yuan transaction services, to adjust business scope, for wholly foreign-funded or joint venture banks to set up branches, when foreign legal entities revise articles of association or when foreign financial institutions quit the market. The Rules coming in September allow application materials to be submitted to the local CBRC branch for an initial examination, then directly sent to the main CBRC office, cutting out the mid-level paper-shuffling.

  The Rules also oblige the CRBC to grant autonomy to foreign banks in appointment of the senior management personnel of their branches, rather than subjecting directors to their approval.

  Approval formality regarding foreign banks’ market access and appointment of senior employees will be greatly simplified, making it easier for foreign banks to enter the Chinese mainland market, said Han Fulin, Vice Director of the Institute of Finance and Securities of the Central University of Finance and Economics.

  Chinese Banks Stay Calm

  Chinese banks are not indicating any uneasiness at the government’s welcome of foreign banks. “Personally, I take an optimistic attitude toward the prospect for Chinese banks’ development after foreign banks’ entry into China,” Sang Yongsong of the Beijing branch of the Shanghai Pudong Development Bank said in an interview. “Easier access for foreign banks into the Chinese market won’t have serious impact on the present Chinese bank structure or situation. Foreign banks mainly operate a few advanced businesses in China, targeting big multinationals, Chinese enterprises included on global fortune lists and individual financing business. So, the target market for foreign banks do not conflict significantly with domestic banks.”

  Three years ago, when China first opened its banking market, domestic banks decried the coming of a “wolf,” perceiving foreign banking competitors as predators.

  Perhaps, since foreign banks have been operating in China for three years, domestic banks are a little more used to the idea of such competition now. Some also offer a more sober assessment as to the disadvantages foreign banks have in operating in China.

  Experts explained some shortcomings in foreign banks’ operations in China, such as a lack of a management network compared to Chinese banks, which will take time to establish. Another difference is Chinese banks fill profit margins mainly through the difference between interest rates of loans and savings, while foreign counterparts profit increasingly through supplying services. So, while foreign banks take in high service fees, domestic banks offer free deposit and withdrawal services. These shortcomings limit foreign banks’ development in China.

  In fact, many restrictions exist for foreign banks. For instance, the present supervision system heavily confines the sources from which foreign banks draw yuan savings. According to regulations, foreign banks cannot have yuan debt surpassing 50 percent of their debt of foreign currencies, which makes it difficult for them to draw yuan saving to solve the currency shortage.

  Professor Zhang Zhuoyuan of the Chinese Academy of Social Sciences thinks that the new Rules can make up for some current deficiencies and reduce the restrictions. “The Rules opened the screen on the Chinese-foreign banking war. Full-scale competition may start in 2006, after completely opening yuan transactions to foreign banks,” he said.

  One banking supervision official thinks that it is not for short-term profit that foreign banks open their business in China, but the long run prospects. After all, it’s only two years and two months away from December 11, 2006.

  Tightening Supervision

  Along with the further opening of yuan transaction, Chinese economists have called for correspondingly more supervision over foreign banks.

  At present, foreign banks’ total assets account for 1.4 percent of the financial assets in China’s banking industry. Industry insiders predict that in the next 15 years this number will exceed 30 percent. Professor Tang Lingxiao of the Changsha University of Science and Technology thinks tightening market supervision over foreign banks is an urgent matter.

  Tang thinks right now China should construct a “scientific” regulatory system to keep in check the presence and size of foreign banking operations in the country. “Estimating and evaluating precisely the risks of foreign banks are key for supervision over market access. When China introduced these foreign banking giants into the market, more emphasis was placed on capital, assets scale and hardware; but the software, like an internal control system and management, are ignored. A scientific set of guidelines is needed to judge the risks of foreign banks to improve the present situation which makes market access to some extent subjective, random and opaque,” Tang said.

  Tang also thinks that when approving foreign banks access into the Chinese market, it is also necessary to make a thorough evaluation of potential factors of risk, such as the qualifications of managers, sufficiency of capital, scale of assets, the supervision system in the bank’s home country or whether they enjoy the deposit-insurance system of the home country. According to these guidelines, foreign banks with relatively lower risks should be approved first.

  Han Fulin thinks the Rules offer a platform to foreign financial institutions for fair operating competition. Yet China’s banking supervisory departments will monitor their performance and risk conditions, just like Chinese banks. “If the supervision were not reinforced, in 10 or 20 years, one bankruptcy of a foreign bank would directly influence China’s economy,” said Han.


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