TAX rates for foreign banks are set to rise in China while those levied on domestic banks could be selectively cut under reform plans. The change in the tax regime would be a stepping stone to allowing foreign banks to conduct local currency business. Di Weiping, deputy director of the People's Bank of China's foreign financial institution department, said foreign rates would be increased while domestic rates would fall. He said the increase for foreign banks would be greater than the decrease for mainland banks. 'The taxes and profits surrendered by Chinese banks, the big four in particular, constitute one of China's main sources of budget revenue,' Mr Di told an international banking conference in Beijing yesterday. He said a big cut in taxes for Chinese banks was therefore unlikely. Mr Di said that a further obstacle to the opening up of local currency business to foreign banks was the development of the bank's monetary management and financial supervision. 'Allowing foreign banks to engage in local currency business will no doubt increase the complexity and difficulty of the people's bank's role in financial regulation and supervision,' Mr Di said. 'In this context, [the process of allowing foreign banks to conduct local currency business] would have to be synchronised with the pace of the enhancement of the central bank's abilities in macroeconomic management and financial supervision.' Although the central bank recently intensified its efforts to allow the gradual participation of foreign banks in the domestic market, Mr Di said 'a too-rapid opening up would generate shocks to the financial system and bring about incalculable consequences to the domestic economy and the financial system'. He said the tax-rate issue had become something of a red herring in the debate on opening up the local currency business. 'It has been suggested that Chinese banks will be subject to unfair competition if foreign banks are allowed to do local currency business while the tax rates are uneven,' he said. 'This argument is a little far fetched.' Mr Di said that although the tax rate for foreign banks was 15 per cent compared with 55 per cent for major Chinese banks, the tax breaks given to foreign banks were usually consolidated as profits on the books of the parent bank. They were then subject to domestic tax rates, which in Japan could be as high as 60 per cent. Several foreign banks had indicated that they would rather be granted a wider business scope than have preferential taxes with a limited business scope, he said. Foreign bank representatives at the conference agreed with Mr Di's assessment of the tax question. However, a number expressed concern the central bank might be dragging its feet over macroeconomic reform. 'I think, without question, most foreign banks will be willing to pay higher taxes in return for local currency business but I am a little worried by Mr Di's cautious approach to financial reform,' a European banker said. 'Of course financial reform is a major undertaking in China but I would have liked to have seen a rather more upbeat prognosis,' the banker said.