Locally incorporated banks have reacted positively to the Hong Kong Monetary Authority's proposal to relax the asset requirement for foreign banks opening SAR branches. Most local banks dismissed fears of a surge in competition, saying new foreign entrants were unlikely to engage in local retail banking. Rather, they believed the proposals would put pressure on China to respond in kind, lowering its own asset criteria for foreign banks to set up branches in China. China imposes a minimum asset requirement of US$20 billion on foreign banks wanting to set up in the mainland. The figure makes the cost of establishing a mainland presence prohibitively high for many small players. According to a proposal unveiled by the HKMA last week, the quasi-central bank would slash the minimum asset criteria for foreign banks to apply for a licence in Hong Kong from US$16 billion to HK$5 billion. The 95 per cent reduction in the minimum asset requirement would mean foreign banks faced the same entry requirements as locally incorporated banks. The HKMA proposals are designed to encourage more foreign banks to open branches in Hong Kong, following a 33 per cent drop in the number of banks and deposit-taking companies in Hong Kong over the past six years. Davy Kwan Kwok-ki, senior vice-president of International Bank of Asia, said that while the HKMA proposals could lead to more competition in the local market they would ultimately aid Hong Kong banks in their mainland ambitions. 'Following China's entry to the World Trade Organisation, some foreign banks have become interested in moving into the China market,' he said. 'The HKMA's timing is right. Relaxing the minimum asset criteria allows foreign banks to set up branches in Hong Kong before moving into China.' He did not see foreign banks as a threat and expected most new entrants would concentrate on corporate banking or syndicated lending, rather than retail banking, which is the traditional backbone of local banks. He said it also brings Hong Kong into line with a worldwide trend among central banks to either abolish or significantly reduce minimum asset entry requirements. Bernard Charnwut Chan, executive director of Asia Commercial Bank, said even if foreign banks decided to enter the retail banking market their presence would have little impact on competition. He said retail banking was already competitive and profit margins were low. He said it was unlikely foreign banks would open large retail banking chains. The banks were more likely to set up a branch in Hong Kong as a stepping stone for them to expand into the China market. He also believed the HKMA proposal may help to encourage China to relax the US$20 billion asset requirement. 'With HKMA to take the lead to set as an example, it would help persuade China to lower its requirement for foreign banks to set up branch in China.'