Global Insight Perspective | |
Significance | Although the new rules have been heralded as a historic step in the gradual opening of China’s financial sector, they are unlikely to have the dramatic effect that was envisioned at the time of China’s accession to the World Trade Organization (WTO), due to the funding requirements that remain. |
Implications | Foreign influence on banking is thus merely expected to grow at a slow pace, with many large lenders expected to focus mainly on tapping the market by minority stakes in Chinese banks. |
Outlook | The move to liberalise the banking sector is, however, an attempt to endorse the new line taken by the U.S. Treasury, which is calling for financial liberalisation in return for a more accepting U.S. attitude towards Chinese policy for gradual exchange-rate reform, which could contribute to a more cooperative trade relationship. |
China Heeds International Calls for Liberalisation of its Banking Sector
The move by the Chinese government to announcelandmark rules to allow foreign banks to offer a full range of services to Chinese customers answers calls from the international community, notably the United States, to fulfill its commitment to liberalisation made as part of its accession to membership of the World Trade Organization (WTO). The rules, which are to take effect on 11 December on the fifth anniversary of China’s entry into the WTO, have been heralded as a historic landmark as regards the opening of the country’s financial sector in the domestic and international press alike, despite the restrictions that remain in place for the operations of foreign banks. Deputy director of the legal office under the State Council, Song Dahan, in a televised news conference, declared that China, with the introduction of the new rules, had fully complied with promises to effectuate ”a full market opening”, while holding that the restrictions that remain in place are fully consistent with international practices and commitments, according to Agence France-Presse (AFP).
A Limited Liberalisation
Under the new rules, foreign banks will be allowed to carry out foreign-currency and yuan-denominated business, including the taking of individual yuan deposits, the granting of short-term as well as long-term loans, as well as banking card business. Currently, foreign banks are merely allowed to engage in yuan-denominated business with Chinese companies, as opposed to individuals, and the offering of foreign-currency loans, while their operations have been limited to 25 cities. As a result the 70 foreign banks from a total of 20 countries, which had set up branches in China by the end of 2005, merely accounted for 0.55% of local-currency loans. Although the new rules serve to deepen liberalisation of the financial sector, a number of restrictions remain, as outlined below:
- In order for foreign-funded and joint-venture banks to conduct yuan retail business in China, they must, like their Chinese counterparts, hold at least 1 billion yuan (US$127 million) in registered capital.
- Foreign lenders operating without a local subsidiary are not allowed to accept fixed-term deposits of less than 1 million yuan from Chinese residents, thereby excluding them from the majority of retail business.
- The total assets of a foreign bank setting up a branch in China must be at least US$20 billion at the end of the year preceding its application.
- A minimum operating capital of 100 million yuan must be held by each branch of the foreign or joint-venture bank, while its ratio between outstanding assets and outstanding liabilities must be equal to or above 25%.
- In a bid to encourage local incorporation, foreign lenders that do not engage in that practice must allocate a capital operating requirement of 200 million yuan, a much lower sum that the 500 million yuan expected based on the draft rules issued.
Outlook and Implications
Although the new rules have been heralded as a historic step in the gradual opening of China’s financial sector, they are unlikely to have the dramatic effect that was envisioned by a number of observers in 2001. This is primarily due to the funding requirements laid down, which have been put in place in a bid to soften the impact of foreign competition on China’s ailing domestic banking sector. The government has spent some US$400 billion on bailouts since 1998 and four of the five largest banks have held initial public offerings in an effort to raise capital, according to Xinhua. The Chinese government has, as part of its preparations to liberalise the financial sector, sought to bolster the capacity of its own banks to deal with increasing competition through the required local incorporation laid out in the new rules. As such, in the short-to-medium term foreign banks are not expected to pose a significant threat to their Chinese counterparts as they will be lagging behind in branch coverage as well as in terms of their client bases and networks. China’s four largest state-owned banks had 70,000 branches compared with merely 214 foreign banks. The most restrictive rule is, however, the requirement that foreign banks are not allowed to accept fixed-term deposits of less than 1 million yuan from Chinese residents, with the high threshold serving to severely restrict the capacity of the foreign lenders to obtain local currency deposits, thereby forcing them to focus on a niche market of the wealthiest segment of the population. This bars them from obtaining access to the growing Chinese middles class with savings over 100,000 yuan, which constitutes a major market for retail business. Therefore foreign influence on banking is merely expected to grow at a slow pace, with many large lenders expected to focus mainly on tapping the market by minority stakes in Chinese banks The restrictions are not expected to deter top lenders, which have already invested large amounts of capital in the Chinese market. Meanwhile, it will severely affect smaller banks with plans to operate retail services, as they will not have the capacity to put down the capital required to start operations.
In international terms, the move to liberalise China’s financial sector is an important step in heeding U.S. calls for further liberalisation, with controversy over the U.S. trade deficit continuing to mar cooperative relations in the field of trade. The United States’ soaring trade deficit as such bloated to US$202 billion in 2005, fuelling charges that the yuan's fixed exchange rate provides an unfair advantage for Chinese exports. A rapprochement has, however, characterised often hostile trade relations after U.S. Treasury Secretary Henry Paulson replaced the more adversarial John Snow in May this year, with Paulson adopting a more pragmatic approach to resolving the deep trade imbalance between the two countries. The new dialogue is grounded in a more accepting U.S. attitude of Chinese policy for gradual exchange-rate reform, in return for more accelerated liberalisation of financial and service sectors that will open markets for U.S. exports. The Chinese government’s move to liberalise its banking sector is as such an attempt to endorse the new line taken by the U.S. Treasury, making for a more cooperative trade relationship. In this context, Chinese authorities are also hoping that Washington’s engagement will provide support for its efforts to counter a developing anti-reform faction.