China Revises Foreign-Invested Banking and Insurance Regulations for Greater Opening-Up

China has been stepping up its pace to grant easier and more expanded market access for foreign investment in the financial sector amid its opening-up initiative under the  Foreign Investment Law (外商投资法), which was adopted on March 15, 2019 and will be effective as of January 1, 2020.  It intends to foster a level-playing field for foreign investors and their domestic counterparts under the same regulatory framework.  In particular, banking and insurance are two primary areas that have seen such efforts in the past couple of years.  On April 8, 2018, the China Banking and Insurance Regulatory Commission (CBIRC) was established as part of the governmental institutional reform.  Since then, a series of policies and measures for further opening-up have been announced, for example, the Governor of the People's Bank of China announced 11 measures in April 2018 during the Boao Forum; the CBIRC issued 12 measures in May 2019; and the Financial Stability and Development Committee of the State Council released 11 measures in July 2019.  More recently, on October 15, 2019, the State Council announced its decisions to amend for the third time the PRC Regulations for the Administration of Foreign-Invested Banks (中华人民共和国外资银行管理条例) ("Regulations of Foreign-Invested Banks") and the PRC Regulations for the Administration of Foreign-Invested Insurance Companies (中华人民共和国外资保险公司管理条例) ("Regulations of Foreign-Invested Insurers", together with Regulations of Foreign-Invested Banks, the "Regulations").  Following the amendments to the Regulations, the CBIRC suggested that it will be accelerating the formulation of rules for implementing such Regulations.

The revisions allow foreign banks to establish both wholly foreign-owned banks and foreign bank branches in China simultaneously

Highlights of Amendments to Regulations of Foreign-Invested Banks

• More options of commercial presence in China The revisions allow foreign banks to establish both wholly foreign-owned banks and foreign bank branches in China simultaneously, or to establish both Sino-foreign joint venture banks and foreign bank branches in China simultaneously, and removes the prior restriction on the concurrent existence of foreign-invested banks and branches by the same foreign investor.  This offers more options to foreign banks as to their forms of commercial presence and a better response to their business requirements in China. It also helps to build a more diversified financial system.
• Reduced capital requirements Previously, a foreign shareholder, being the sole or major shareholder, could not apply to establish a wholly foreign-owned bank or a Sino-foreign joint venture bank unless its total assets were above US$10 billion before the application; similarly, a foreign bank who wanted to establish branches in China had to have an asset threshold of US$20 billion).  These requirements have been removed in the amended Regulations of Foreign-Invested Banks, which is expected to encourage smaller-sized players to establish their China presence.
• Wider choice of Chinese partners The revised provisions have also relaxed the restriction that the sole or major Chinese shareholder of a Sino-foreign joint venture bank could be a financial institution, allowing foreign investors to have wider options when choosing their Chinese partners.
• Broadened business scope of foreign-invested banks The amendments have newly added "agency business, including issuance, redemption and underwriting of government bonds" and "agency collections and payments", into the permitted business scope of foreign-invested banks and branches, allowing them to expand their service capacities.  Such business scope expansion is expected to bring foreign investors and their Chinese competitors to put them on the same footing and boost the vitality of relevant business sectors.
• Lowered entry barriers for certain businesses Foreign bank branches are now allowed to accept renminbi fixed-term deposits of no less than Rmb500,000 from Chinese citizens, instead of Rmb1,000,000.  The revised provisions also removed the requirement for foreign invested banks to obtain approval to transact business in renminbi after a one-year waiting period. Now, they are able to operate renminbi business upon establishment.  This will be good news particularly for foreign investors who already have offshore renminbi business capacity prior to entering the China market.
• Refined regulatory rules on foreign bank branches The revisions have adjusted the supervisory requirements on working capital of foreign bank branches and supervisory evaluation approaches, which is expected to provide greater flexibility and freedom in capital utilization and further unleash foreign banks' potential.

The new Regulations of Foreign-Invested Insurers allow foreign insurance group companies to establish foreign-invested insurance companies in China

Highlights of Amendments to Regulation of Foreign-Invested Insurers

• Eased access by foreign group companies The new Regulations of Foreign-Invested Insurers allow foreign insurance group companies to establish foreign-invested insurance companies in China. This would expand the scope of the founding shareholders from foreign insurance companies in a specific sector, e.g. life insurance, property insurance (which are usually subsidiaries of an insurance group) to insurance group companies. In November 2019, Allianz Group, a global insurance group, obtained the CBIRC's approval to operate as China's first wholly foreign-owned insurance holding company.
• Expanded access by foreign financial institutions The Regulations of Foreign-Invested Insurers also allow foreign financial institutions to become shareholders of foreign-invested insurance companies in China, while previously they could only participate in insurance companies established by domestic companies.
• Lowered entry barriers The Regulations of Foreign-Invested Insurers have removed the two requirements that pertained to a foreign insurer: i) have a track record in the business for over 30 years and ii) have a representative office in China for more than two years before applying to establish a foreign-invested insurer in China. The relaxation is expected to encourage smaller-sized investors to enter this market.

Implications

China is one of the world's most important banking and insurance markets.  The new amendments will encourage more active and diversified participation in the Chinese banking and insurance sectors from more foreign investors, especially smaller-sized players, and will foster a more friendly and level-playing field for foreign investors.  The ease of market access, relaxation of requirements on shareholder status and the encouragement of a more diversified commercial presence will bring both commercial opportunities and regulatory challenges to foreign investors who seek to expand their presence or explore new (cooperative) opportunities in China.