China Eases Foreign Entry into Bank Sector

China's banking regulator announced a wider opening of the domestic market to foreign banks and finance companies on Monday, bolstering the arguments Wen Jiabao, the premier, plans to take to Washington next week to combat US charges of unfair trade.

Liu Mingkang, chairman of the China Banking Regulatory Commission (CBRC), also confirmed that a sequenced, bank-by-bank approach would be adopted to recapitalise China's large state banks. He did not give any time frame or divulge the size of planned capital injections into the banks.

Market access for foreign banks in China has been a thorny issue in China's commercial relationship with the US and European Union, with both complaining that Beijing was failing to live up to its commitments under the World Trade Organisation.

Mr Liu announced reductions on the high capital requirements Beijing imposed on foreign banks' business in China. The highest capital requirement for banks offering renminbi services to foreign customers will be cut from Rmb600m ($72.5m) to Rmb500m. The second highest requirement will be trimmed from Rmb500m to Rmb400m.

In addition, the capital requirements for branches of foreign banks incorporated in China were to be significantly reduced, Mr Liu said. However, there is no change to the rule that foreign banks may only open one new branch a year.

Mr Liu formally announced the maximum equity stake a single foreign investor may take in a Chinese bank had been raised from 15 to 20 per cent, but the maximum stake by all foreign interests would remain at 25 per cent.

Several foreign banks including Citibank; HSBC; International Finance Corp, the private sector arm of the World Bank; and other companies have taken stakes in Chinese banks. Many more, including Standard Chartered, are considering options.

As part of China's WTO commitments, Mr Liu confirmed that foreign banks would be allowed, starting on Monday, to do renminbi business in the cities of Jinan, Fuzhou, Chengdu and Chongqing, bring the total number of cities open for this business to 13.

On auto finance, Mr Liu said the CBRC was studying applications from Toyota Motor Corp, Volkswagen AG and General Motors Corp to set up auto financing operations.

Overall, Mr Liu took issue with a sense among foreign bankers that their business was being crimped by the weight of restrictive regulations.

Even though their market share was a tiny 1.4 per cent, Mr Liu said the 191 operating entities of foreign banks experienced a 29.7 per cent increase in assets in the first 10 months of this year. The 84 banks conducting renminbi business saw their profit on this business rise 37 per cent in the same period, he said.

On the planned bail-out for large state banks, Mr Liu gave little away. Lou Jiwei, vice-minister of finance, told the Financial Times last month that one bank would be selected first for a capital injection after it had demonstrated real progress in reducing its non-performing loans and improving its corporate governance.

Following this, the bank may be allowed to list on the stock market, either in Hong Kong or in Shanghai.