China's banking regulator is likely to complete a revised administrative rule soon that would allow foreign banks to deal with renminbi retail business across the country.

The draft rule would need further approval from the State Council, a source, who declined to be named, said yesterday.

A total of 101 foreign bank branches and six foreign banking corporations were allowed to deal in renminbi business in China's 25 cities at the end of April.[China Daily]

Foreign banks would be encouraged to register corporations in China instead of setting up branches to deal with renminbi business in order to protect the interests of domestic depositors, according to the revised rule. The minimum registered capital of a foreign banking corporation is said to be around US$125 million.

"The new rule will allow foreign banks to choose a diversified presence in the country, and a foreign banking corporation registered with local administration will enjoy much more favourable treatment than a foreign bank branch," the source said.

The rule is likely to restrict US$125,000 as a minimum amount for foreign bank branches wanting to collect deposits from local residents' accounts, while a foreign banking corporation is not likely to face restrictions and would be able to deal in all types of renminbi business under the new rule.

Since foreign banks will be able to deal in renminbi with local residents by the end of 2006, it is important foreign banks are registered locally to protect the interests of domestic depositors and maintain the security of the country's financial system, said an analyst, who declined to be named. This practice is more in line with the global norm and more accessible for local supervision, he added.

Foreign banks, which currently deal with renminbi business in 25 cities, will be allowed to expand across the country and extend their clients from enterprises to local residents at the end of 2006 under the revised draft rule.

The revision is part of China's push to realize its World Trade Organization commitment in banking, which is scheduled to open up completely to foreign capital at the end of this year.
 
The new rule will also encourage foreign banks to expand their business in China's middle and western regions. Foreign banks expanding their renminbi business in these areas will be given preference in entering the market.

At the end of April, 72 foreign-funded banks from 21 countries and areas have set up 182 branches and 14 banking corporations in China. Total assets of the foreign-funded banks hit US$94.1 billion, accounting for 1.9 per cent of financial institutions' total banking assets.

A total of 101 foreign bank branches and six foreign banking corporations were allowed to deal in renminbi business in China's 25 cities at the end of April.

However, foreign banks currently concentrate their business in the country's eastern areas such as Shanghai, Shenzhen, Beijing and Guangzhou. Shanghai has 30 per cent of foreign banking institutions, which account for 55 of their total business revenue.

"Currently the competition between Chinese banks is very intense. I do not think that allowing foreign banks dealing with renminbi business will have much more impact on the domestic banks unless foreign banks choose to co-operate with local banks, because local banks have already built a nationwide network across the country," said Yi Xianrong, a researcher from the Chinese Academy of Social Sciences.

However, some believed that the entrance of foreign banks into the sector would have a big impact on Chinese banks. The biggest impact will be on renminbi savings, as foreign banks are likely to siphon off some of the money, which has grown by an annual average of 2 trillion yuan (US$246 billion) in recent years from local banks.

Shi Jiliang, former vice-chairman of the China Banking Regulatory Commission, said earlier in March that it was likely that a number of the smaller banks might lose clients to foreign banks.

But, he added, as foreign banks only focus on high-end clients, there would not be an exodus of savings deposits in the initial phase after liberalization.

Chinese banks would need to improve their competitiveness by accelerating reform and improving their services to be able to withstand the impact, he said.

Editor: Yan