China banking law: Revised regulations on foreign invested banks

After almost a year since the draft revised Regulations on the Administration of Foreign Invested Bank¹ (the Regulations) were published for public comment, the formal Regulations were promulgated on October 15, 2019.

The formal version of the Regulations does not differ very much from the previous draft, but compared to the 2014 version, there are quite a number of notable changes that liberalize restrictions on foreign investment in the retail banking sector in China.

The key updates are:

Wider scope of Chinese investors for joint venture banks

The new Regulations no longer require the sole/principal Chinese shareholder of a joint venture bank to be a financial institution, although the sole/principal foreign shareholder must still be a commercial bank. This change provides foreign investors with a wider choice of Chinese joint venture partners.

Lower assets test thresholds for sole/principal foreign investors

The previous requirement for a foreign investor to have total assets of not less than:

1. US$10bn to set up a wholly owned subsidiary bank or a joint venture bank; or
2. US$20bn to set up a branch in China

no longer applies.

The removal of this requirement is good news for smaller sized foreign banks looking to enter the Chinese market.

No single presence requirement

The new Regulations have removed the single presence restriction and now allow a foreign bank to set up:

1. a wholly-owned subsidiary bank and a branch at the same time; or
2. a joint venture bank and a branch at the same time.

In addition, it is no longer a requirement for the branch’s business to be limited to wholesale banking.

Broader scope of business for foreign invested banks

• Foreign invested banks are now permitted to engage in agency business in the following areas: issuance, redemption and underwriting of government bonds; and agency collections and payments.
• The threshold for a single Renminbi fixed-term deposit which a branch may accept from Chinese citizens has been lowered from RMB1m to RMB500,000.
• The pre-requisite for foreign invested banks to obtain consent  from China Banking and Insurance Regulatory Commission (CBIRC) to transact business in Renminbi after its first year of operation in China has been abolished. The consent will be granted at the same time when CBIRC grants approval for business opening to a foreign invested bank. 

Greater flexibility for branches to use capital

• Branches are granted greater flexibility to use capital as they are no longer required to retain 30 percent of their operational capital as interest-generating assets. The new Regulations seem to permit the relevant branch to calculate this threshold on their own but this is subject to approval from CBIRC and the People’s Bank of China.
• Branches whose foreign parents have complied with the capital adequacy ratio requirements set by the regulators in their home jurisdictions as well as China are no longer subject to the strict eight percent ratio requirement of Renminbi assets to Renminbi risk weighted assets.

These recent developments are very encouraging and will hopefully result in more foreign banks (in particular banks that are smaller and innovative) entering into or expanding their business in the China retail banking market. However, it remains to be seen how these new Regulations are implemented in practice and it is expected that implementation rules in respect of the new Regulations will be issued in order to provide more clarity and practical guidance on these key reforms.