Overall, the main lesson of international experience is that foreign banks can bring important benefits if appropriate incentives and sufficient opportunities are created. In any event, with or without foreign participation, China's banking system needs to continue to forge ahead with fundamental reforms in internal control, risk management, and corporate governance, to improve the intermediation of China's large pool of domestic say IL. FOREIGN BANKS IN CHINA So far, foreign banks' direct activities have remained restricted. As of end-September 2006, foreign-funded banks accounted for 1.8 percent of total banking assets. Similar to other types of banking institutions, foreign-invested commercial banks are supervised and regulated by on their RMB-denominated operations, mainly in providing banking services to uma the China Bank Regulatory Commission( CBRC), and there have been important restriction in domestic banks. There have been three rather distinct phases in this entry into Chinese ors More recently, foreign banks are starting to play a more substantial role as minority invest 1996-2001: isolated transactions China: Ownershp Structure ofthe Frve largest Commercal Bunk with niche players like the Bank oo of Shanghai and Nanjing Commercial Bank Foreign somoN portfolio investors were mainly multilateral financial institutions who had no active operational role 2001-2004 with the conclusion of Chinas WTO negotiations, foreign banks' entry increased Entry was limited to joint-stock commercial banks and city banks Share ef Bank Assets Hed by Far in in major cities. The large state owned banks were in poor financial situation and foreign investors were mostly interested potentially the most profitable geographical areas. Smaller banks also required smaller investments Late 2004-present: foreign Arsem Mere investors' interest intensified Soures: CGFS CONK ECB; eatDmalcentnalbanks; BS. further, as reforms in the large
4 S ha re o f B a nk As s e ts He ld by F o re ig n B a nks 0 20 40 60 80 100 Bulgaria Hungary China Ho ng Kong SAR India Ko rea Argentina Mexico 1990 2004 So urces : CGFS (2004); ECB; natio nal central banks ; BIS. Overall, the main lesson of international experience is that foreign banks can bring important benefits if appropriate incentives and sufficient opportunities are created. In any event, with or without foreign participation, China’s banking system needs to continue to forge ahead with fundamental reforms in internal control, risk management, and corporate governance, to improve the intermediation of China’s large pool of domestic savings. II. FOREIGN BANKS IN CHINA So far, foreign banks’ direct activities have remained restricted. As of end-September 2006, foreign-funded banks accounted for 1.8 percent of total banking assets. Similar to other types of banking institutions, foreign-invested commercial banks are supervised and regulated by the China Bank Regulatory Commission (CBRC), and there have been important restrictions on their RMB-denominated operations, mainly in providing banking services to individuals. More recently, foreign banks are starting to play a more substantial role as minority investors in domestic banks. There have been three rather distinct phases in this entry into Chinese banks. • 1996–2001: isolated transactions with niche players like the Bank of Shanghai and Nanjing Commercial Bank. Foreign portfolio investors were mainly multilateral financial institutions who had no active operational role. • 2001–2004: with the conclusion of China’s WTO negotiations, foreign banks’ entry increased. Entry was limited to joint-stock commercial banks and city banks in major cities. The large stateowned banks were in poor financial situation and foreign investors were mostly interested in potentially the most profitable geographical areas. Smaller banks also required smaller investments. • Late 2004-present: foreign investors’ interest intensified further, as reforms in the large 0.0 200.0 400.0 600.0 800.0 1000.0 ICBC ABC BOC CCB BCOMM Strategic investors Financial investors (incl. IPO) Government agencies and companies China: Ownership Structure of the Five largest Commercial Banks (Total assets in billions of US$)
state-owned banks gathered speed and as the government began to permit higher foreign ownership Since 2004, foreign strategic investors have entered in four of the largest five banks. The 2004 purchase by Hong Kong and Shanghai Banking Corporation(HSBC)of a stake in the Bank of Communications(BoCom), Chinas fifth largest bank, was the first major transaction. Since June 2005, foreign investors have invested or committed to invest over USS14 billion in the three large state-owned commercial banks, and all three have acquired strategic investors: the Bank of America(BOA)in China Construction Bank(CCB),a consortium led by Royal Bank of Scotland(rBS)in the Bank of China(BOC), and Goldman Sachs led investor group in the Industrial and Commercial Bank of China (ICBC). Table 1 provides an overview of these investments Box 1. Opening the Banking Sector to Foreign Investment in Late 2006 In its WTO accession agreement, China has committed to a phased-in liberalization of foreign bank access to its banking market, with the aim to fully open its banking sector to foreign bank participation, without geographic or client restrictions, effective December 11. 2006 Foreign banks and branches would be permitted to engage in a similar range of financial services as Chinese banks, and they would be treated and regulated in the same way as domestic banks. Specifically, for conducting local currency business, geographic restrictions were to be lifted as of December 11. 2006. With regard to commercial presence, there would be no geographic restrictions for conducting foreign currency business. In addition, foreign financial institutions licensed to provide local currency services in one region would be able to do so in any other region that has been opened for such business. As of December 11, 2006 all non-prudential market access constraints on foreign banks which restrict ownership, operation, and juridical form of foreign financial institutions, including on internal branching and licenses were also be lifted In November 2006, the authorities issued Regulations for the administration of foreign Funded Banks, which should implement the WTO commitments. As a result of these new regulations, access to Chinese banking market will be easier, but building a larger presence could take some time as foreign banks must satisfy certain requirements before they can granted approval for offering full domestic currency services to Chinese individuals. To fulfill these requirements, foreign banks must establish an incorporated affiliate in China with minimum capital of RMb 1 billion and each branch must have a minimum capital of RMB 100 million. Furthermore, foreign financial institutions plying to engage in local currency business must have three years of business operation experience in China and have been profitable for two consecutive years prior to applying Ownership by a single foreign investor is limited to 20 percent, while the combined share of all foreign investors in one bank is limited to 25 percent
5 state-owned banks gathered speed and as the government began to permit higher foreign ownership.4 Since 2004, foreign strategic investors have entered in four of the largest five banks. The 2004 purchase by Hong Kong and Shanghai Banking Corporation (HSBC) of a stake in the Bank of Communications (BoCom), China’s fifth largest bank, was the first major transaction. Since June 2005, foreign investors have invested or committed to invest over US$14 billion in the three large state-owned commercial banks, and all three have acquired strategic investors: the Bank of America (BOA) in China Construction Bank (CCB), a consortium led by Royal Bank of Scotland (RBS) in the Bank of China (BOC), and Goldman Sachs led investor group in the Industrial and Commercial Bank of China (ICBC). Table 1 provides an overview of these investments. 4 Ownership by a single foreign investor is limited to 20 percent, while the combined share of all foreign investors in one bank is limited to 25 percent. Box 1. Opening the Banking Sector to Foreign Investment in Late 2006 In its WTO accession agreement, China has committed to a phased-in liberalization of foreign bank access to its banking market, with the aim to fully open its banking sector to foreign bank participation, without geographic or client restrictions, effective December 11, 2006. Foreign banks and branches would be permitted to engage in a similar range of financial services as Chinese banks, and they would be treated and regulated in the same way as domestic banks. Specifically, for conducting local currency business, geographic restrictions were to be lifted as of December 11, 2006. With regard to commercial presence, there would be no geographic restrictions for conducting foreign currency business. In addition, foreign financial institutions licensed to provide local currency services in one region would be able to do so in any other region that has been opened for such business. As of December 11, 2006 all non-prudential market access constraints on foreign banks which restrict ownership, operation, and juridical form of foreign financial institutions, including on internal branching and licenses were also be lifted. In November 2006, the authorities issued Regulations for the Administration of ForeignFunded Banks, which should implement the WTO commitments. As a result of these new regulations, access to Chinese banking market will be easier, but building a larger presence could take some time as foreign banks must satisfy certain requirements before they can granted approval for offering full domestic currency services to Chinese individuals. To fulfill these requirements, foreign banks must establish an incorporated affiliate in China with minimum capital of RMB 1 billion and each branch must have a minimum capital of RMB 100 million. Furthermore, foreign financial institutions applying to engage in local currency business must have three years of business operation experience in China and have been profitable for two consecutive years prior to applying