More Hong Kong banks are expected to establish their branches in Shenzhen in the coming years after a landmark free trade deal between Hong Kong and the mainland has drastically reduced the minimum asset requirements for Hong Kong banks aiming to enter the mainland market, said an official at the Shenzhen branch of the central bank Wednesday.

Under the Closer Economic Partnership Arrangement (CEPA) signed almost a week ago, Hong Kong companies will be given greater market access in 17 service sectors, including banking and insurance, from January next year.

The asset requirements for Hong Kong banks and finance companies seeking to enter the mainland market will be slashed to US$6 billion from US$20 billion.

The reduction of asset threshold gives Hong Kong's small and medium-sized banks a chance to compete with their larger rivals as they scramble to take a slice in mainland's rapidly expanding economy and US$1 trillion in personal savings.

"About eight Hong Kong banks and finance companies are eligible to set up their mainland branches based on their total assets by the end of last year," said the official at the People's Bank of China, who asked not to be named.

He said that these banks, which had been excluded by the previouse restrictions, include Dah Sing Financial, Wing Lung Bank, ICBC (Asia), Wing Hang Bank, Shanghai Commercial Bank Ltd. and CITIC Ka Wah Bank.

He said that fierce competition and weak economy have combined to squeeze the profit margins of Hong Kong banks, which are looking to the mainland market for new revenue sources.

"Shenzhen's unique geographical location of neighboring Hong Kong and its position as one of the country's financial hubs makes it very attractive for Hong Kong banks seeking mainland presence," the official said.

Shenzhen is keen to cash in on the recent trade deal to boost the city's economic growth. It unveiled a set of incentive policies to lure Hong Kong banks and financial institutions to the city.

These measues include a finance development fund, discount land prices for institutions seeking to build headquarters or regional headquarters in the city and a subsidy of up to 1,000 yuan (US$120.77) per square meter on the purchase of local office space.

China is gradually opening its financial sector to foreign competition following its entry to the World Trade Organization in late 2001. Foreign banks cannot conduct local currency business with Chinese individuals until late 2006.

Editor: James