Latest rules present barriers for overseas players seeking domestic incorporation Foreign banks will continue to face significant regulatory and market barriers in China even after new market-opening regulations go into effect on December 11. That was the consensus among foreign and domestic lenders and analysts after the banking regulator released the new rules yesterday. In keeping with the commitments China made on joining the World Trade Organisation in 2001, the government will now allow foreign banks to take deposits and do business with domestic individuals but will require them to incorporate domestically if they want to offer a full range of services. 'The newly revised regulations open full yuan business to locally incorporated foreign banks while exercising a certain degree of restriction on foreign bank branches,' said Song Dahan, the vice-minister of the Legislative Affairs Office of the State Council. The most important incentives to incorporate domestically were the ability to offer lucrative bank and credit card services to local clients and to accept term deposits of less than one million yuan from mainland customers. Direct subsidiaries of foreign banks are barred from these businesses. To incorporate domestically, a foreign bank must have at least US$10 billion in assets, and its mainland operation must have at least one billion yuan in registered capital as well as provide at least 100 million yuan in operating capital for every branch opened. 'This is not a major obstacle for the big banks,' said Citigroup analyst Huang Yiping. He said the increase in foreign direct investment in China last month was most likely due to foreign banks shifting funds into China in preparation to meet these registered capital requirements. Standard Chartered Bank said yesterday it has already sought approval to set up a mainland-incorporated bank, although China Banking Regulatory Commission vice-chairman Wang Zhaoxing said the regulator would not begin accepting applications until December 11. 'The most important obstacle to foreign banks will be the licensing and approval process for individual business lines and branch networks,' Mr Huang said. Analysts believe most of the leading banks operating in China will apply for domestic incorporation, a process Mr Wang said should take between one and three months. Mainland-incorporated foreign banks will still enjoy tax breaks reserved for overseas investors that subject them to a top corporate tax rate of just 15 per cent, compared with the 33 per cent paid by Chinese banks. This probably will not change until 2008 at the earliest when Beijing is expected to complete a long-awaited tax unification plan. Even if the China market were completely barrier-free, foreign banks are destined to play a relatively minor role in the mainland market for years to come. With China's banking market growing at double-digit rates and large state-owned lenders boasting tens of thousands of branches and 100 million customers each, it will 'take foreign banks a very long time to gain a large share of the market through organic growth', said Fitch banking analyst Charlene Chu. 'That's why they are concentrating on strategic acquisitions.' When China joined the WTO five years ago, the technically bankrupt banking sector was in such straits that no one involved in the talks thought to even broach the subject of foreign investment in Chinese banks. However, in the past two years, foreign financial institutions have poured a combined US$18.3 billion in strategic investments into the country's largest banks, which have gone on to raise US$45 billion through sales of shares to public investors in Hong Kong and Shanghai. On Wednesday, Zhang Jianguo, the president of China Construction Bank, the country's fourth-largest lender, expressed confidence in its ability to withstand the coming assault by foreign lenders. 'Foreign competitors entering China is a great motivation for us to become a better bank,' he said. China Construction Bank chief financial officer Pang Xiusheng pointed to mainland banks' knowledge about the local market and well-established client base as advantages over their better managed and more sophisticated foreign adversaries. He did not mention the state-owned banks' political connections and strategic importance to the government, which make it unlikely the government will allow foreign banks to gain dominant market positions. 'The sector will continue to open but the government will remain cautious and it will be a gradual process,' Mr Huang said. 'In this regard, China is not unique.'