WAITING for China to approve local currency business for foreign banks is rather like waiting for Deng Xiaoping to die: you know it has to happen sometime, it just has not happened yet and it may be sometime before it does. Rumours concerning both subjects have been flying around since the late 1980s and many pundits on numerous occasions have been convinced that one or both events are imminent. But just as China's patriarch continues to breathe, foreign banks wait for that illusive approval from the People's Bank. The latest noises from Beijing and Shanghai about foreign banks being allowed to engage in local currency business on a limited, experimental basis in Pudong, does not really bring us much closer to the grand approval from the central bank. No one seems clear exactly what the Pudong experiment will entail. Some bankers, particularly those with branches located on the Bund, are suggesting that the Pudong experimental banking zone be extended across the Huangpu River to include Shanghai's most famous thoroughfare. Others suggest the established banks should simply go to the back of the line and wait until they have been given permission to open a branch in Pudong. Even if and when it is decided who gets in, there is the problem of whether their business will be limited to clients in Pudong, whether those clients will be restricted to Sino-Foreign joint ventures with local currency holdings, or whether they will have access to broader, Shanghai-wide client base. The People's Bank is not saying much on the issue and this may be because central bank policy-makers have not yet decided what the policy will be. Cynics might suggest that the experiment, vague details of which have been leaked to the media over the past month, is simply a smokescreen designed to keep the hopes of foreign banks up. Huge obstacles to local currency business exist, the most obvious being the disparity between the tax rate of foreign banks, 15 per cent, and the main Chinese commercial banks, 55 per cent. Bank officials have made it clear foreign banks will not be allowed access to the local currency trade monopolised by the commercial banks until the taxation playing field has been levelled. Some foreign bankers suggest the playing field could be levelled by taxing their local currency business at the same 55 per cent, on the assumption that 45 per cent net earnings is better than no earnings at all. This is a rather disingenuous suggestion. The big commercial banks do not want to see foreign banks taxed at 55 per cent, or even 95 per cent, they want to be taxed at 15 per cent. And even if their tax burden is reduced to a level comparable to foreign banks, the commercial banks will continue to fight tooth and nail to maintain their grip on the lucrative local currency market.
