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Foreign banks review rules for China retail market

China’s regulators are finalising details of the rules and, to obtain feedback, have sent a draft to a handful of foreign banks that can already do yuan business with Chinese corporations, said a central bank source familiar with the situation.

“We are considering picking one or two foreign banks to act as a pilot for the new rules,” he said, adding that the rules were scheduled to be published in December.

Foreign banks are currently not allowed to do business with individual clients in the local currency. The changes will open up big opportunities -- China has some $1.8 trillion in personal savings, and its economy is growing at breakneck speed.

The draft rules, a copy of which was seen by Reuters on Monday, say authorities will “encourage and guide” overseas banks which want access to the retail market to set up onshore entities with registered capital of 1 billion yuan ($125 million). That would come on top of the money needed to open branches.

The move appears aimed at aligning the rules for foreign and major nationwide domestic lenders, which need to cough up 1 billion yuan to secure banking licences, as the domestic banking market opens in accordance with pledges made when Beijing joined the World Trade Organisation in 2001.

Applications to incorporate in China could begin on Dec. 10, one day before foreign banks can apply to do yuan business with individuals, the official China Securities Journal reported on Monday.

Only the wealthy

Fixed deposits taken from Chinese residents by qualified foreign banks must be over 1 million yuan, the draft rules say.

That provision would rule out many middle- and lower-income Chinese customers, limiting foreign banks to wealthy clients. It may be the most unpalatable part of the draft for the foreign banks and is likely to be a focus of their discussions with Chinese regulators in coming months.

The draft rules also stipulate that foreign banks wanting to issue bank cards in China -- a lucrative area in which many are interested -- must be incorporated within the country.

A number of foreign banks contacted said they were aware of the expected regulatory changes.

“What we are doing is looking closely into the subject, and we’ll come up with recommendations very soon for our own bank’s review,” said Sheila Wong, head of corporate affairs for Standard Chartered.

HSBC, which received the draft regulations on Monday, views the proposed new rules as positive for China’s banking industry in the long term, China Chief Executive Richard Yorke told a news conference in Shanghai.

Under the draft rules, foreign lenders would see the capital requirements for individual branches fall from around 300 million yuan now to 100 million, in line with rules for domestic lenders.

But overseas banks may continue to face restrictions on the number of branches they are allowed to set up, since yuan banking licences would be given separately to each individual branch of a foreign bank, providing regulators with plenty of opportunity to drag their heels.

Either way, foreign lenders may have to pay the same 33 percent tax rate as do their Chinese counterparts.

Foreign firms now pay only 15 percent in income taxes but are widely expected to pay the same as Chinese companies when Beijing unifies the tax rate, which could be unified at around 25 percent as early as 2007, according to state media.

One foreign banker said the new rules could be viewed as a way for China to slow down the approval process for the small number of overseas lenders eyeing their own network of retail branches in the world’s fourth-largest economy.

But May Yan, a banking specialist with Moody’s Investors Service in Hong Kong, said incorporation was unlikely to be a major headache for large banks used to taking such steps in countries such as the Philippines.

“I don’t think the intention is explicitly linked to slowing down foreign expansion in China,” said Yan. “It’s more about harmonising the registration procedures and the treatment of foreign banks versus domestic lenders.”