How can international banks operate in your jurisdiction?

Foreign banks (Foreign Banks) can operate in China either as subsidiaries or branches. A subsidiary of a foreign bank (Foreign Bank Subsidiary) is a separate legal entity from its parent, and as such requires its own governance and risk management, as well as meeting capital and liquidity requirements in China. Foreign Bank Subsidiaries can be either wholly foreign owned banks or Sino-foreign joint venture banks. Although a branch of a foreign bank (Foreign Bank Branch) forms part of the same legal entity as its head office (i.e. the Foreign Bank), it is also regarded as a banking business operating vehicle in China which must comply with the applicable requirements under Chinese laws and regulations governing banks.

The China Banking Regulatory Commission (CBRC) is the regulator supervising Foreign Bank Subsidiaries and Foreign Bank Branches. The establishment of Foreign Bank Subsidiaries and Foreign Bank Branches in China are subject to sophisticated qualification requirements and regulatory approvals of the CBRC.

Foreign Bank Subsidiaries that have been approved by the CBRC are generally permitted to engage in the same businesses as licensed domestic banks, except for some restricted businesses such as the issuance of financial bonds or government bonds which can only be conducted by licensed domestic banks. However, Foreign Bank Branches are subject to wider restrictions on their business operations in China. For example, they cannot engage in:

  • bank card business; and
  • RMB related businesses with Chinese national individuals unless taking fixed-term deposits of not less than RMB 1 million.

What considerations does your regulator take into account when an international bank wishes to open a branch in your jurisdiction?

The Foreign Bank must satisfy certain qualification requirements in order to establish of a Foreign Bank Branch in China. The key requirements include that:

  • it shall have sustainable profit-making ability and good credibility with no record of material violation of laws or regulations;
  • it shall have experience of engaging in international financial activities;
  • it shall have effective anti-money laundering policies in place;
  • it shall be under effective regulation by competent financial regulators of its home country/region which have also approved its application to set up a Foreign Bank Branch in China;
  • it shall have total assets of not less than USD 20 billion by the end of the preceding year of application, or in the case of Foreign Banks in regions such as Hong Kong or Macau, total assets of not less than USD $6 billion;
  • it shall comply with the capital adequacy requirements stipulated by its home country/region regulator and the CBRC respectively;
  • it shall comply with other prudential requirements of the CBRC; and
  • its home country/region shall be in a good economic situation, have a well established financial supervisory and administrative system, and have established a sound supervisory and administrative cooperation mechanism with the CBRC.

Is resolution an important factor in your supervisor’s determination of a branch?

The concept of a recovery and resolution plan was introduced very recently to China’s banking industry. According to the relevant CBRC regulations, Chinese domestic banks have been required by the CBRC to gradually prepare their own recovery and resolution plans. The CBRC will review the recovery and resolution plans for the establishment of private-funded banks.

The CBRC has not yet applied the concept of recovery and resolution plans to foreign-invested banks (including the Foreign Bank Branch). However, according to a latest public speech delivered by a CBRC official, the CBRC is now contemplating to do so in order to increase the crisis management ability of China-based foreign-invested banks, protect the interest of domestic depositors, and to maintain the safety of China’s financial system.

What are the regulatory reporting requirements placed on branches?

The Foreign Bank Branch is subject to various reporting obligations on regular or case-by-case basis.

Events subject to regular reporting to the CBRC

  • a monthly report where the asset-side balance in overseas interbank transactions and affiliated institutions of the Foreign Bank Branch exceeds the sum of the liability-side balance of the same plus the working capital;
  • a quarterly report where the aggregate of undistributed profits and the net loss/profit of the Foreign Bank Branch for the current year is a negative figure, and the sum of the absolute value of that negative figure plus the loss provisions which should, but have not, been set aside exceeds 30% of the working capital;
  • a quarterly report where the balance of credit granted to all key clients by the Foreign Bank Branch exceeds eight times of its working capital;
  • a quarterly report on large cross-border movements of funds and asset transfers of the Foreign Bank Branch;
  • a report, by end of each June and December, on the status of the interest-bearing assets of the Foreign Bank Branch;
  • the annual report and management proposal of the Foreign Bank Branch within four months of the end of each financial year; and
  • the annual report of the Foreign Bank within six months of the end of each accounting year.

Events subject to case-by-case reporting to the CBRC

  • the transfer of credit assets by the Foreign Bank to the Foreign Bank Branch within five days thereafter;
  • the business suspension of the Foreign Bank Branch for more than three days but less than six months within five days upon both the business suspension and the business resumption;
  • the launch of new products of the Foreign Bank Branch within five days of engaging in business of such new products;
  • if the designated management personnel of the Foreign Bank Branch have been absent from their offices for more than one month consecutively it must be immediately reported;
  • the main risks and the corresponding risk avoidance measures contained in the outsourcing agreements prior to the execution of such outsourcing agreements by the Foreign Bank Branch;
  • the utilization of interest-bearing assets by the Foreign Bank Branch within five days after such utilization;
  • material problems in the financial status and business activities of the Foreign Bank Branch;
  • any material change to the operational strategies of the Foreign Bank Branch; and
  • operational suspension for less than two days (inclusive) of the Foreign Bank Branch at least seven days prior to such suspension.

The Foreign Bank Branch shall also report to CBRC in a timely manner upon the occurrence of any of the following events in relation to it’s head office (i.e. the Foreign Bank):

  • a change to the  articles of association, registered capital and registered address of the Foreign Bank;
  • the restructuring of the Foreign Bank, or change of the chairman or president (or the chief executive officer or the general manager) of the Foreign Bank;
  • the occurrence of serious problems to the financial and operational activities of the Foreign Bank;
  • significant legal proceedings being brought against the Foreign Bank;
  • significant regulatory actions being taken against the Foreign Bank by the relevant regulatory authorities in the country/region where the Foreign Bank is located or where any of its other overseas branches is located; and
  • significant changes being made to the financial regulatory laws and regulations or financial regulatory systems of the country where the Foreign Bank is located.

Additionally, the Foreign Bank Branch is also required to properly disclose various risks to which it is exposed and how it manages those risks.

According to the relevant CBRC regulations, if the Foreign Bank Branch fails to fulfil the disclosure obligations as set out above, CBRC may require it to report within a designated time limit and impose a fine ranging from RMB 200,000 to RMB 500,000. In case of a serious breach, the CBRC may order the Foreign Bank Branch to suspend its business operation or even revoke its financial license.

Do you allow dual licenses whereby a banking group may hold a banking license through the branch and have a subsidiary also holding a banking license?

A Foreign Bank can establish a business presence in China through either a Foreign Bank Branch or a Foreign Bank Subsidiary, subject to different sets of qualification requirements under applicable laws and regulations. Please note that the permitted scope of business of a Foreign Bank Branch will be much narrower than that of a Foreign Bank Subsidiary. CBRC will, upon receiving the applications, review the qualifications of the Foreign Bank and will, generally speaking, not unreasonably withhold approvals if all the requirements have been satisfied. Legally speaking, there are no express laws or regulations prohibiting a Foreign Bank to concurrently own a Foreign Bank Subsidiary and a Foreign Bank Branch in China. However, in practice, we understand from our no name basis consultation with CBRC that, in the last three years, the CBRC has ceased to issue new licences that would result in this circumstance. In other words, if a Foreign Bank has already established several Foreign Bank Branches in China and wishes to set up a Foreign Bank Subsidiary holding a banking licence concurrently, it has to convert one of these Foreign Bank Branches into a Foreign Bank Subsidiary and convert all other Foreign Bank Branches into domestic branches of the Foreign Bank Subsidiary. This is normally referred to as “local-incorporation” of Foreign Banks. Most Foreign Banks entering into the Chinese domestic market at the early stage of China’s “opening-up” have completed their “local-incorporation” process in the last few years.

As background, access to China’s banking market by Foreign Banks was liberalized step by step in accordance with China’s commitments to the World Trade Organization (WTO). Initially, a Foreign Bank was only permitted to establish Foreign Bank Branches in China. Five years after China’s access to the WTO, a Foreign Bank was further allowed to locally incorporate a Foreign Bank Subsidiary conducting banking business or to convert an existing Foreign Bank Branch into a Foreign Bank Subsidiary.

Where can I find further information?