This article was written by Chen Yun, Wang Rong, Liang Yixuan
After the promulgation of the State Council’s Decision on Amending the Regulations of the People’s Republic of China (“PRC”) on the Administration of Foreign Funded Banks (Consultation Paper) (the “Administrative Regulations Consultation Paper”) in late October 2018, the China Banking and Insurance Regulatory Commission (“CBIRC”) released the Decision on Amending the Implementation Rules of the Regulations of the PRC on the Administration of Foreign Funded Banks (Consultation Paper) (the “Implementation Rules Consultation Paper”, together with the Administrative Regulations Consultation Paper, the “Consultation Papers”) on 28 November 2018 to solicit public opinions.
The main purposes of amending these two legislations, which are of ultimate importance to the supervision of foreign funded banks (“FF Banks”) are to put into practice the country’s opening-up policies in the banking sector, to make law to implement the opening-up measures in the banking sector, which have been repeatedly referred to by senior government officials in various summits and public speeches, and to further liberalize the foreign investment in China’s banking sector.
The amendments made by the Consultation Papers focus on the following aspects:
Allowing foreign banks to maintain PRC branches (“FB Branches”) and locally incorporated banks in China (“FB LIBs”) at the same time
Lifting the restrictions on the conducting of the RMB business by FB Branches and FB LIBs
Broadening the business scope of FB Branches and FB LIBs
Relaxing the operating funds requirements for FB Branches
I.Institutions Subject to the Regulation of the Consultation Papers
As early as 17 August 2018, CBIRC abolished the Administrative Measures on Equity Investment by Foreign Funded Financial Institutions in Chinese Funded Financial Institutions, and removed the 25% ceiling of foreign shareholding in a Chinese funded commercial bank by amending the Implementation Measures of the Administrative Licensing Items for Chinese Funded Commercial Banks. It is also stipulated that a commercial bank will be regulated as the category of the bank as the one when and into which the foreign investment is made.
Therefore, foreign banks may set up from scratch joint-venture FB LIBs (“JV Banks”) or wholly foreign owned FB LIBs (“WFOBs”) regulated as FF Banks, or may otherwise become, by way of making investments into Chinese funded commercial banks, the shareholders of joint-venture banks with more than 25% foreign ownership or wholly foreign owned banks, which are converted from and regulated as Chinese funded commercial banks.
Notwithstanding the above, the institutions subject to the regulation of the Consultation Papers remain those regulated as FF Banks, namely WFOBs, JV Banks, FB Branches and PRC representative offices of foreign banks. As far as joint-venture banks or wholly foreign owned banks converted from and regulated as Chinese funded commercial banks as the result of the investment by foreign banks are concerned, the Consultation Papers do not apply.
II.Allowing Foreign Banks to Maintain FB Branches and FB LIBs at the Same Time
One of the most appealing changes made by the Consultation Papers is that foreign banks would be allowed to maintain both FB LIBs (i.e. WFOBs and JV Banks regulated as FF Banks) and FB Branches) at the same time. As a result, foreign banks would no longer be forced to make a hard choice between local incorporation and keeping FB Branches.
Back in late 2006, when converting their FB Branches into WFOBs, foreign banks were allowed to retain an FB Branch to carry on their foreign exchange (“FX”) wholesale business for a certain period of time (i.e. a transition period), in order to facilitate the to-be-established WFOBs to meet the relevant regulatory indicators requirements and to facilitate the retained branch to phase out the outstanding FX wholesale business, only that such retained branch shall be closed upon the expiry of the transition period.
However, in the Implementation Rules of the Regulations of the PRC on the Administration of Foreign Funded Banks which was promulgated on 1 July 2015 and took effect on 1September of the same year, the relevant provisions on the retention of an FX wholesale business branch upon local incorporation of foreign banks were deleted, thus made such approach no longer workable. In practice, CBIRC (then the China Banking Regulatory Commission) also rejected the application from any foreign bank for retaining an FX wholesale business branch when converting its FB Branches into a WFOB.
This policy change directly led to the delay in the local incorporation process of some foreign banks since, without the FX wholesale business branch retained, their to-be-established WFOBs may not meet the specific regulatory indicators requirements.
Now, the change made by the Consultation Papers allowing foreign banks to maintain both FB LIBs and FB Branches (although the Consultation Papers require that in such circumstances, the FB Branches would only be allowed to conduct the wholesale business, with a substantial breakthrough being that such wholesale business covers not only FX business but also RMB business) at the same time would make it easier for foreign banks to enter into the China market.
It is worth mentioning that the Consultation Papers also set out prohibitions or restrictions on the independence and the risk isolation mechanism of the management, personnel, business, information and related party transactions of FB LIBs and FB Branches.
III.Lifting the Restrictions on the Conducting of the RMB Business
With regard to the RMB business, the following material changes are made by the Consultation Papers:
- The “waiting period” (i.e. a period of time for which an FB LIB or an FB Branch shall open business before applying for conducting the RMB business) for the RMB business of FB LIBs and FB Branches is cancelled;
- The minimum amount required for FB Branches to accept the fixed term deposit from Chinese citizens is lowered from RMB 1 million to RMB 0.5 million;
- FB LIBs or FB Branches are allowed to conduct the preparatory work for the RMB business simultaneously with that for setting up FB LIBs or FB Branches, and to submit the application for the opening of the RMB business simultaneously with that for the business opening of FB LIBs and FB Branches. Thus, the RMB business may be opened Day One when FB LIBs and FB Branches open their businesses; and
- In the case of multiple FB Branches, the managing FB Branch may authorize other FB Branches to conduct the RMB business as long as the managing FB Branch itself has obtained the RMB business license.
IV.Broadening the Business Scope
The Administrative Regulations Consultation Paper includes “acting as the issuance agent, payment agent and/or underwriter of Chinese government bonds” into the business scope of FB LIBs and FB Branches. Thus, the business scope of an FB LIB is substantially the same as that of a Chinese funded commercial bank.
In addition, the Implementation Measures Consultation Paper restates that the following types of business of FB LIBs and FB Branches are subject to the afterwards reporting requirement only, which was provided in the Circular on the Conducting of Certain Businesses by Foreign Funded Banks (the “Circular”) issued by the General Office of CBIRC on March 10, 2017 and now documented into a regulation by CBIRC: (1) acting as the issuance agent, payment agent and underwriter of Chinese government bonds; (2) providing custody, escrow and guardianship services; (3) providing consultancy services such as financial advisory services; (4) providing overseas wealth management services for and on behalf of the clients; and (5) such other businesses as CBIRC may deem to be subject to the afterwards reporting requirement.
Furthermore, the Implementation Measures Consultation Paper restates the regulations of the Circular allowing the intra-group cooperation (namely, allowing FB LIBs and FB Branches to cooperate with their parent bank groups to provide comprehensive financial services to Chinese enterprises in offshore bond issuance, listing, acquisition, financing and the like by taking the advantages of their global service networks.
V.Relaxing the Operating Funds Requirements for FB Branches
In respect of the operating funds requirements of FB Branches, the Consultation Papers have made the following adjustments as well:
|| Current Rules
|| Rules under the Consultation Papers
| Deposit of operating funds
|| 30% of the total operating funds shall be deposited as interest bearing assets
|| No less than 5% of the total debts owed to the public shall be qualified assets
If the balance of the qualified assets reaches 30% of the total operating funds, additional qualified assets are not mandatorily required
The ratio is calculated on a daily basis
All FB Branches of a foreign bank shall be examined on a consolidated basis
If the ratio requirement is met, existing FB Branches may allot certain operating funds to the newly established FB Branch(es)
|Scope of eligible interest bearing assets/
| The FX interest bearing assets should be deposited as FX fixed term deposits with a tenor of 6 months or more
The RMB interest bearing assets should be either RMB denominated treasury bonds or deposited as RMB fixed term deposits with a tenor of 6 months or more Qualified assets include treasury bonds issued by the Ministry of Finance of the PRC, notes or papers issued by the People’s Bank of China, bonds, notes or papers issued by Chinese policy banks, inter-bank fixed term deposits deposited at designated institutions with a tenor of 1 month or more, and such other assets as recognized by CBIRC
| Qualified assets include treasury bonds issued by the Ministry of Finance of the PRC, notes or papers issued by the People’s Bank of China, bonds, notes or papers issued by Chinese policy banks, inter-bank fixed term deposits deposited at designated institutions with a tenor of 1 month or more, and such other assets as recognized by CBIRC
| Restrictions on the deposit of eligible interest bearing assets/
| Interest bearing assets deposited as fixed term deposits shall be deposited at no more than 3 Chinese funded commercial banks within the territory of China with sound operation and financial strengths
Interest bearing assets in the form of RMB denominated treasury bonds shall not be pledged for repo transactions or be imposed with other burdens which would limit the disposal of such interest bearing assets
| Designated institutions refer to those non-related locally incorporated banks in China with sound operation and financial strengths
Qualified assets deposited as fixed term deposits shall be deposited at no more than 3 designated institutions
Pledged assets or assets subject to other burdens that may limit the disposal thereof are not classified as qualified assets
| Equivalent capital adequacy ratio requirement
|| The ratio of the RMB amount of the aggregate of the operating finds and such items as reserves to the amount of RMB risk adjusted assets shall not be lower than 8%
|| The 8% ratio requirement remains unchanged. However, based on the principle of reciprocity, for those foreign banks whose capital adequacy ratios continuously meet the CBIRC requirement and the requirement imposed upon by the financial regulators at the places in which they are incorporated, CBIRC may waive the 8% ratio requirement for their FB Branches
VI.Other Changes and Our Observations
Apart from the above significant changes, the Consultation Papers also make certain changes in the areas such as the outsourcing activities conducted by FB LIBs and FB Braches and their termination and liquidation.
Although the Consultation Papers are subject to the solicitation of public opinions before finalization, one can be assured that China is on the track of more opening-ups in its banking sector.
With abundant experience of assisting foreign funded financial institutions in setting up their PRC presences, carrying on their business in compliance with the law, exploring new business boundaries and seeking business cooperation, King & Wood Mallesons is right here standing by to hold your hands crossing the jungle!