The Hindu Business Line : China accelerates banking reforms

WELL before the deadline set for the full opening up of its banking sector, China has started making it easy for foreign banks to operate. If it is in a hurry it is because at the next Olympic games in Beijing in 2008, China will seek to showcase not only its supremacy in sports, but that it is second to none in infrastructure, technology, hospitality and so forth. All this needs to be bankrolled starting from now. China is committed to the World Trade Organisation to fully open up its banking sector from end-2006.

About 200 foreign banks — foreign funded institutions, as they are called — have entered China so far. Originally their operations were limited to foreign exchange business. Half of these have already been allowed to conduct business in the local currency, renminbi. Of these, 53 have been approved to provide renminbi services to Chinese enterprises, a policy change that came into force only late last year. The remaining 47 are permitted to provide local currency services to foreign-invested companies only. Foreign banks have so far been allowed to provide 12 categories of services, including online banking, underwriting of Treasury bonds, real-estate mortgage loans, cash management and wealth management.

The China Banking Regulatory Commission (CBRC), which has taken over the supervision of the mammoth banking sector from last year, has announced a number of relaxation of rules to foreign banks, effective September 1, to "appropriately reduce foreign banks' operating costs in China and promote their healthy growth".

The minimum capital requirements for foreign banks seeking to do local currency yuan business for Chinese corporate entities is being reduced to 300 million yuan ($36 million) from 400 million yuan. For those banks seeking to offer such services to Chinese citizens, the capital requirement is being cut to 500 million yuan ($60 million) from 600 million yuan. As per China's WTO commitments, foreign banks are not allowed to provide local currency services to Chinese individuals until end-2006.

More significantly, a key rule governing branch expansion by foreign banks has also been relaxed. Unlike in the past, foreign banks need no more wait for a year between the opening of each additional branch. The new rules apply to locally-registered foreign banks, local branches of overseas-incorporated banks, Sino-foreign joint venture banks and foreign or joint-venture financial companies.

At the same time, the CBRC, while retaining the existing stipulations on capital adequacy, management and provisioning for non-performing loans, has also vested the banking regulators with added disciplinary authority over foreign banks.

Analysts say foreign banks in China are set to gain from the sector's accelerated reforms, which will generate enormous opportunities for them. Foreign banks' local currency-denominated assets are estimated around $10 billion now, which works out to just 1.4 per cent of China's total banking assets. There is, thus, enormous scope for fresh business for foreign banks in China. Which is why some 200 more foreign banks have opened representative offices in China.

Banking reforms

Since the beginning of economic reforms in 1978, China has been following a complex system of regulating foreign banks with multiple restrictions on geographic area, domestic currency business, foreign currency operations, and so on. The policy for allowing foreign banks was dictated by:

The need to aid economic development while avoiding potential negative impact;

Promotion of foreign institutions without harming domestic financial industry to ensure orderly deepening of the financial reform and integration with the international financial system; and

Bilateral reciprocity in granting access to the Chinese market.

With these objectives in view, China has been opening up it banking sector in a gradual manner. In the first phase, from the late 1970s to the early 1980s, foreign banks were allowed to open representative offices. Then, up to the early 1990s, they were allowed to open operational branches in Special Economic Zones such as Shenzhen followed later by Shanghai and seven other coastal cities.

In the mid-1990s, a comprehensive set of rules governing foreign financial institutions were announced for the first time and foreign banks were allowed to operate in 23 cities.

Since 1996, they have been allowed to open branches all across China; and towards the end of 1990s, undertake local currency business.

Banking commission

In a decisive act to reform its beleaguered financial sector, China last year set up the CBRC to "consolidate the supervisory functions over banks, asset management companies, investment trust companies and other deposit taking institutions".

The responsibility of the People's Bank of China, the central bank, was confined to monetary policy.

There has been mounting criticism that vast amounts of non-performing loans at China's commercial banks and rural credit co-operatives over the years were simply written off with increases in the central bank's re-lending. China's bold initiative is remarkable in the light of the fact that there is no clear global trend as to whether bank supervision should be independent from monetary policy.

Indian banks

Before China's entry into the WTO, banking relations between India and China were based on the `MoU on Banking Relations'. State Bank of India was the first to set up a Representative Office in Shanghai in 1997.

Following China's WTO entry, there has been a tremendous surge in India-China economic relations. Bilateral trade between the two economies is set to cross $10 billion this year.

The list of Indian corporate entities venturing into China has also been rapidly lengthening in recent years. The high degree of synergy in economic cooperation between the two economies has been highlighted by many observers.

According to an analyst, "India and China share interests on many key trade issues... while areas of bilateral interest may not exist at present between the two countries, the growing importance of India in international trade as well as the existing strength of the Chinese economy suggests that the two countries together could form a powerful lobby to address shared external interests... coordinated efforts between the two countries could generate greater tangible success, with significant economic implications".

Sensing the mood, many Indian public sector banks are lining up to open representative offices in different parts of China; one has just set up an office in Shanghai.

(The author is an economist in Indian Overseas Bank and can be contacted at dvenu@vsnl.net)