Foreign Participation In Chinese Banks Under New Investment Rules

A Citibank led consortium won the bid for 85.6% of Guangdong Development Bank in December 2006 for RMB24.27 billion, ending a long battle with rivals French Bank Societe Generale and China’s second largest insurer Ping An Group. The deal coincides with the changes to rules governing foreign banks in China.

As part of China’s commitment in its accession to the World Trade Organization, China recently promulgated the PRC Foreign Invested Banks Administration Regulations and the PRC Foreign Invested Banks Implementing Rules. The new rules have significant effect on investments in domestic Chinese banks and came into effect on 11 December 2006.

The rules now more clearly define what "foreign invested banks" are. It may be in one of the following four legal structures but the scope of permitted business will depend on the chosen structure :-

• Wholly foreign owned bank ("WFOB") : Invested solely by one foreign bank or together with other foreign financial institution(s) and the minimum registered capital of a WFOB is RMB1billion (or its equivalent in foreign currencies);
• Sino-foreign joint venture bank ("JVB") : Invested by foreign financial institution(s) together with PRC corporations or enterprises and the minimum registered capital of a JVB is RMB1billion (or its equivalent in foreign currencies);
• Branch office ("Branch") : Branch office of a foreign bank and the foreign bank must allocate a minimum of RMB200million operational capital to the Branch;
• Representative office ("Representative Office") : Representative office of a foreign bank. There is no capital requirement for a bank’s representative office.

The new rules define the conditions which foreign investors must meet before they can invest in PRC foreign invested banks. Amongst other requirements, the sole shareholder or controlling shareholder of a WFOB and the controlling shareholder of a JVB must satisfy the following conditions :-

1. be a commercial bank;
2. with total assets of no less than US$10 billion in the preceding year of the application;
3. have a representative office within PRC for at least 2 years (in the case of a WFOB); and have a representative office within PRC (in the case of JVB).

The new rules effectively require the controlling shareholder or lead shareholder to be a sizeable commercial bank and prohibit private equity investors or non-bank foreign service company or investment fund to be lead investors in such transactions. The Implementing Rules also give China Banking Regulatory Commission ("CBRC") wide powers to veto potential investors due to unclear shareholding structure, unusual connected transactions or other considerations.

Pursuant to Article 29 of the Regulations, both WFOBs and JVBs are allowed to conduct a range of foreign exchange and RMB banking business including the taking of RMB deposits from the public, advancing short, medium and long term loans and conducting bank card business etc. Therefore, locally incorporated WFOBs and JVBs are now permitted to conduct a range of services that were exclusive to PRC domestic banks in the past and are allowed to compete directly with domestic banks in most banking sectors.

The permitted business scope of Branches is similar to but is narrower than those of WFOBs and JVBs. Branches are not allowed to conduct bank card business and may only accept RMB time deposits from the public that exceeds RMB1million per transaction.

Representative Offices are only allowed to conduct non-operational business (liaison, market investigation and consultancy) related to its establishing foreign bank.

Pursuant to the Regulations, foreign banks may transform their Branches into WFOBs through application to the CBRC and the paid-up operational capital of existing Branches may be transferred to the WFOBs after conversion upon obtaining approval from CBRC. The time period required for such transformation is around 6 months from application.

WFOBs and JVBs will be subject to the asset to liability ratio of 75% set out in the PRC banking laws and regulations. A grace period will be granted to existing WFOBs and JVBs and WFOBs transformed from Branches to comply with such asset to liability ratio.

Lawyers in our China Business Practice regularly advise clients on foreign direct investments, taking security in China and China banking issues. For more information on the above new rules, please contact us.

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