China tests a US-style grading scheme to ring-fence banking system from risks as it opens financial market to more foreign participation

The scheme is based on a descending scale of one to five, with the best-run 1A banks scoring between 95 and 100 points, while those with less than 45 points are rated five

The new rating system applies to branches of banks from foreign countries, Hong Kong, Macau and Taiwan that have operated in China for one full financial year

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A stone lion in front of the building of the China Banking and Insurance Regulatory Commission (CBIRC) in Beijing on October 29, 2020. Photo: VCG/VCG via Getty Images.

Published: 2:45pm, 28 Dec 2022Updated: 3:00pm, 28 Dec 2022

China’s bank regulator is refining its management of foreign lenders, adopting a similar rating scheme as the US to ring-fence the financial system against risks, while opening the gates to allow more wholly foreign-owned financial institutions to operate in the country.

Under a pilot programme using a rating system, regulators will look more closely at the risk compliance and management of the branches of foreign banks in China. Branches that are mismanaged, or engage in risky businesses will lose points under the scheme, according to the rules by the China Banking and Insurance Regulatory Commission (CBIRC).

“Regulatory rating is an important part of off-site inspection and has a core, fundamental position during the whole regulatory process,” the CBIRC said in a November 30 statement released on Tuesday.

The scheme appears to be similar in nature to the ROCA system used in the United States, which assigns numbers in a descending scale of 1 to 5 to grade the risk management (40 per cent), operational controls (30 per cent), compliance (20 per cent) and asset quality (10 per cent) of foreign banks operating in the US, under the Office of the Comptroller of the Currency.

Protesters unfurled banners at the China Banking and Insurance Regulatory Commission (CBIRC) office in the Henan provincial capital of Zhengzhou on May 30, 2022, demanding the return of their money after assets were frozen. Photo: Weibo.

China’s banking system was hit by scams this year, when the founders of several rural banks absconded billions of yuan of deposits in Anhui and Henan provinces, robbing thousands of depositors of their life savings. The crisis prompted protests and violent crackdowns by the authorities, especially in the Henan provincial capital of Zhengzhou.

The number of foreign banks in China soared between 2006 and 2016, from 224 to 1,031, according to data compiled by Statista. So far, no foreign-owned banks have been implicated in any of China’s financial scams.