China: Foreign banks breathe easier

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Life for foreign banks in China should be easier now that the China Banking Regulatory Commission (CBRC) has made important changes to the rules governing their activities that should create a more level playing field.

By Noah Sin

Foreign banks will no longer need to ask for the banking watchdog’s approval before they offer offshore wealth management services, act as custodians for these services and for mutual funds, or repatriate funds for foreign financial institutions facing liquidation, the CBRC said on February 24.

The CBRC also simplified the procedure for foreign banks to open branches and tap the onshore debt market when it scrapped the requirement to get a legal opinion from a local law firm before issuing debt. Finally, the regulator clarified some of the requirements for foreign banks that want to acquire equity stakes in local banks.

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Kimi Liu,
Clifford Chance
Kimi Liu, senior associate at Clifford Chance, says the move was a big step, effectively extending the earlier liberalization in March last year, when the CBRC removed the requirement for foreign banks to file for approval when providing offshore services such as bonds, IPOs, M&A and other financing activities to Chinese clients.

“The abolition of this approval requirement [for the QDII business] has reflected CBRC’s trend to streamline the licensing regime for wealth management business,” says Liu. 

Offshore market

Raymond Yeung, chief economist for Greater China at ANZ, says the new rules on offshore products might well change foreign banks’ fortunes in the Chinese market.

Foreign banks in China have a large network and established infrastructures in the offshore market,” he says. “This is their only edge in the Chinese market. Chinese banks’ offshore business, with the exception of Bank of China, is still in an embryonic stage in the offshore market.”

The other step by the CBRC that attracted attention was the lifting of upper limits of foreign ownership in the financial sector, supporting the ministry of finance’s policy announced in November.

The banking watchdog set out pre-conditions – including three consecutive years of profits – for foreign banks acquiring stakes in local peers. This is the first time regulators have made these criteria explicit, says Liu.

Some say that the absence of such a framework was never the main obstacle to the growth of foreign banks in China. 

The real novelty with the latest batch of rules is elsewhere, says Grace Wu, senior director of financial institutions at Fitch.

“Simplified procedures for new branch opening and debt issuance are probably the most significant, as these approvals [used to] take a long time in the past and have hindered the pace of expansion for foreign banks,” she says.

But the change will not boost the business of all foreign banks, says a spokeswoman for an international bank with a China joint venture. 

“This is more significant for banks providing retail banking services,” she says. “I don’t think you will see lots of foreign banks, many of which are focused on institutional clients, rushing to open branches.”