Who does this affect?

Foreign banks operating in China by way of branches, wholly-owned and joint venture banks, as well as representative offices.

What do you need to do?

Foreign banks will have to incorporate wholly-owned banks or joint venture banks within China if they wish to offer bank card and retail banking services to Chinese citizens in RMB.

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Stuart Valentine
(萬思陶)
Partner
T +852 3443 1080

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Hong Kong
Stuart Valentine  (萬思陶)
Foreign banks will have to incorporate wholly-owned banks or joint venture banks within China if they wish to offer bank card and retail banking services to Chinese citizens in RMB.

Beijing
John Shi  (史卫)
Foreign banks will have to incorporate wholly-owned banks or joint venture banks within China if they wish to offer bank card and retail banking services to Chinese citizens in RMB.

London
Adrienne Showering  
Foreign banks will have to incorporate wholly-owned banks or joint venture banks within China if they wish to offer bank card and retail banking services to Chinese citizens in RMB.

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China has issued new rules to govern foreign banks' activities in China from 11 December 2006. To participate in the potentially lucrative retail RMB (renminbi) business and bank card business foreign banks have to incorporate subsidiaries in China as wholly-owned banks or Sino-foreign joint venture banks. These conditions will require most international banks to radically restructure their operational structures in China.

The "Regulations on the Administration of Foreign-Funded Banks" were issued by the State Council. They take effect on the fifth anniversary of China's accession to the World Trade Organisation, 11 December 2006. The rules follow on from commitments China made when it joined the WTO in December 2001 and meet the deadline for opening China's banking industry to international competition.

Although they do away with the geographic restrictions on foreign banks' institutional RMB business, the requirement to incorporate local subsidiaries to be able to offer retail RMB business and bank card business to Chinese citizens was not foreshadowed in China's WTO commitments.

Few international banks have incorporated wholly-owned or joint venture subsidiaries in China. Most prefer to operate through branches (which are not able to offer such services under the Regulations) or strategic investments of less than 25% in domestic banks (which are not subject to the Regulations).

Who does the law affect?

The Regulations apply to the following institutions (“foreign-funded banks”) established by foreign banks in China:

• a bank wholly-owned by a foreign bank or jointly-owned by a foreign bank with another foreign financial institution;
• a Sino-foreign joint venture bank jointly funded by a foreign financial institution and one or more Chinese companies;
• a branch of a foreign bank; or
• a representative office of a foreign bank.

What do the Regulations do?

The Regulations mainly deal with the setting up and operation of branches of foreign banks and wholly-owned or joint venture subsidiary banks established in China by foreign banks. The provisions on representative offices do little more than confirm the pre-existing situation.

The main pre-conditions for setting up a branch (US$20 billion assets and having maintained a representative office in China for two years) and a wholly-owned or joint venture bank (US$10 billion assets and having maintained a representative office in China for two years) are consistent with China's WTO undertakings. Applicants must also meet additional requirements concerning adequate capital adequacy and effective anti-money laundering systems.

The minimum working capital that must be allocated to a branch of a foreign bank is RMB200 million (approximately US$23.3 million), and the minimum paid-up capital of a foreign wholly-owned or joint venture bank is RMB1 billion (approximately US$128 million). Both figures represent an increase on the current requirements.

Changes to permitted scope of business

The key changes to the current regulatory regime concern the scope of business of branches and subsidiary wholly-owned or joint venture banks. In the previous rules governing foreign banks and other foreign financial institutions in China (issued in December 2001, and repealed by the Regulations), the permitted scope of business specified for branches and wholly-owned or joint venture banks was identical. Both were subject to the same geographical restrictions and limitations on the nature of customers as specified in China's WTO commitments. The Regulations now expand the permitted scope of business for wholly-owned and joint venture banks, but narrow it for branches of foreign banks:

• wholly-owned or joint venture banks: may engage in any of the businesses previously permitted under the December 2001 rules (including bank card business – though this was never approved by the banking regulators), as well as the new provision of acting as an agent for insurance companies, in either foreign exchange or RMB (see Article 29)
• branches: may engage in any of the businesses previously permitted under the December 2001 rules with the exception of bank card business, as well as the new provision of acting as an agent for insurance companies, but they are only allowed to engage in the permitted RMB businesses with customers "other than Chinese citizens" (see Article 31)

For a list of items specified in these Articles to be within the permitted scope of business of wholly-owned and joint venture banks and foreign bank branches (as well as a full text of the Regulations):

view our unofficial English translation of the Regulations

view the Chinese text of the Regulations

As a result, foreign banks now face new hurdles which will require them to incorporate wholly-owned banks or joint venture banks within China if they wish to offer bank card and retail banking services to Chinese citizens in RMB. This is a prospect which has been held out to foreign banks for the past five years under China's WTO commitments – but without such a pre-condition.

Disclaimer
The views set out in this publication are based on our experience as international counsel representing clients in their business activities in China. As is the case for all international law firms licensed in China, we are authorised to provide information concerning the effect of the Chinese legal environment. However we are not admitted to practise Chinese law and so are unable to issue opinions on matters of Chinese law.