Lifting bans on foreign banks

The State Council released the PRC Regulations for the Administration of Foreign-invested Banks (2nd Revision) (2015 Regulations), which took effect January 1 2015 and lifts certain bans on foreign-invested banks in relation to their business activities and network expansion in China.

The first piece of legislation that allowed foreign banks to establish a presence in China (as opposed to limited geographic areas) can be traced back to 1994, when the State Council published the Regulations on the Administration of Foreign-funded Financial Institutions (1994 Regulations). The 1994 Regulations apply to not only foreign-invested banks in China, but foreign-invested finance companies as well.

In 2006, the first PRC Regulations for the Administration of Foreign-invested Banks was published to specifically govern foreign banks in setting up and operating businesses in China. In particular, quite a few foreign banks transformed their branches in China into subsidiary banks following its implementation.

According to the statistics of the China Banking Regulatory Commission (CBRC) regarding the presence of foreign-invested banks in China, as of 2013, there were 42 locally incorporated banks, 92 foreign bank branches and 182 foreign bank representative offices, from 51 countries and regions around the world. Needless to say, foreign-invested banks are playing an increasingly important role in today's Chinese banking industry.

However, in recent years, the growth of foreign banks in China has slowed, in terms of factors such as market share and overall performance. Based on information disclosed by the CBRC, the number of newly opened foreign-invested bank branches reached its peak of 35 in 2008 and declined to 22 in 2013.

Relaxing away

The 2015 Regulations mainly focus on lifting certain restrictions on the market and business entry of foreign-invested banks.

No representative office needed

Before the new rules, in order for a foreign bank to set up a subsidiary bank (whether in the form of a 100%-owned subsidiary or joint venture with a Chinese partner) or a branch in China, it must first have a representative office in China. The representative office must have existed for at least two years before the application for setting up a wholly-owned subsidiary bank or branch can be submitted. This requirement has been in place since the 1994 Regulations, and has been removed in the 2015 Regulations.

In order to set up a representative office in China, the foreign bank needs to apply to the CBRC for approval. The entire process can take one year or even longer. A representative office is not permitted to carry out business activities and can only engage in limited activities such as liaison and market information collection. The removal of this pre-condition allows foreign banks to establish and operate their business in China much quicker.

Capital requirement cancelled

Previously, when a foreign bank's subsidiary sets up a new branch in China, it was required to allocate at least Rmb100 million working capital to the new branch. The 2015 Regulations have abolished this requirement as well.

Typically a subsidiary bank increases its capital through retention of its own profit as well as contribution of additional capital from its parent bank, which requires the approval of the Chinese authorities and therefore takes time. This regulatory change is likely to promote the expansion of foreign bank subsidiaries' own networks in China and enable them to manage their funds more efficiently.

Renminbi transactions eased

This could be viewed as the most important change under the 2015 Regulations.

Under the new rules:

(a) in order for a foreign bank's subsidiary or branch in China to engage in the renminbi business, the subsidiary bank or branch should have been operating in China for over one year. Comparatively, before the 2nd revision, the applicant had to have been operating in China for at least three years and been profitable for two consecutive years; and
(b) if a foreign bank has more than one branch in China and one of these branches has been approved to engage in the renminbi business, when its other branches in China apply for the renminbi business, the other branches should not be subject to the foregoing one-year operation requirement.

For a long time, the restrictions on foreign-invested banks engaging in renminbi transactions have been a major barrier for them to grow in China. The 2015 Regulations greatly relax the application conditions for engaging in the renminbi business. Foreign-invested banks will be able to expand their operations much more conveniently.

Levelling the playing field

These regulatory changes can be viewed to echo the State policy in late 2013 that pledged to further open up the financial market as well as offer national treatment to foreign-invested banks just like Chinese-owned commercial banks. For instance, the removal of the minimum capital requirement for new branches makes the foreign-invested bank regulations consistent with the PRC Commercial Banking Law on this specific point.

While other restrictions and requirements remain for foreign banks to enter into the China market, the 2015 Regulations are nevertheless a positive signal that China will continue to liberalise the banking industry and hopefully attract more investment from foreign banks. This opens up a new chapter that brings new challenges for Chinese banks.


Barry Cheng, Hong Kong, and Charles Chen, Shanghai, Baker & McKenzie