China is raising the hurdles for foreign banks, more than tripling the amount of capital that new entrants to the country must post and limiting the derivatives operations of those already on the ground

October 9, 2013 10:19 am

China raises hurdles for foreign banks

By Simon Rabinovitch in Shanghai

China is raising the hurdles for foreign banks, more than tripling the amount of capital that new entrants to the country must post and limiting the derivatives operations of those already on the ground. But at the same time, the Chinese regulator also has offered foreign lenders much-desired clarification about how they can sell bonds in the domestic market, issue credit cards and offer overseas investment products to their clients on the mainland.While Chinese banks have surged ahead in recent years, foreign banks have struggled to get a foothold in China and control less than 2 per cent of the country’s banking assets, lower than in any other major emerging market.

The regulator said the new rules, though stricter in some areas, represented an “optimisation” of guidelines and were part of the central government’s drive to reduce administrative interference for companies in the private sector.

Almost all of the world’s biggest banks already have licences in China, so the new capital rules will only affect smaller international lenders yet to enter the country.

The China Banking Regulatory Commission has submitted a draft of the revisions to foreign banks and others in the industry, soliciting feedback by October 30. The draft regulations, seen by the Financial Times, are a substantial expansion of the existing rules, running to 90 pages in length. The rules were originally published in 2006 and have not been substantially modified since.

The changes include a plan to raise the minimum registered capital for newly incorporated foreign banks in China or new China-foreign joint ventures to Rmb1bn ($163m) from Rmb300m. Registered capital – different from bank capital – is the amount that companies are required to invest in their Chinese operations to gain a business licence.

“Along with closing the door on relatively smaller banks, this will also greatly increase the asset value and the risk tolerance ability of foreign banks in the future,” said the Shanghai Securities News, an official newspaper.

The draft rules also add several layers of regulation to banks’ derivatives operations in China. Foreign banks will for the first time be divided into two categories for derivatives trading. Those in the “base” category will only be permitted to conduct fully hedged derivative trading, while those in the “ordinary” grouping will be allowed to conduct unhedged derivative trading, subject to a raft of risk controls.

Regulators adjusted the derivative rules to make them more rigorous, according to the Shanghai Securities News.

Along with closing the door on relatively smaller banks, this will also greatly increase the asset value and the risk tolerance ability of foreign banks in the future

– Shanghai Securities News

With a steady stream of new derivatives in China –government bond futures were reintroduced last month and crude futures are expected to debut soon – the derivatives market is increasingly lucrative and appealing to foreign banks as an important potential source of revenue. But in the wake of big losses for Chinese state-owned enterprises during the global financial crisis on overseas derivatives, regulators have been wary of giving foreign banks a big role in the domestic derivatives market.

The new regulations also set out rules for foreign banks to issue bonds and other products to raise capital; launch credit cards for domestic clients; and establish fund management operations, including for investments tied to overseas products. Some foreign banks have already been engaged in these business lines, but the guidelines governing them have been published on a largely piecemeal basis. The new regulations consolidate them in a single document.