China's retail banking sector is now fully open for foreign banks engaging in RMB business. However, the new rules require foreign banks to incorporate in China before taking full advantage, and incorporation subjects the banks to higher registered capital requirements and various prescribed loan ratios. Existing branches of foreign banks have limited access to RMB business and are thus pressured to incorporate. The new rules, effective 11 December 2006, coincide with the fifth anniversary of China's accession to the WTO.

Key points arising out of the new rules include:

  • Scope of Business

Banks incorporated in China - either as wholly foreign-owned enterprises (WFOEs) or Sino-foreign joint ventures (JVs) - may now engage in a full range of retail banking services in foreign exchange and RMB without geographical restrictions. Branches of foreign banks, however, are excluded from bank card services and may only offer a full range of other foreign exchange and RMB services to Chinese enterprises (including FIEs) and foreign nationals. For Chinese nationals, a branch of a foreign bank may only accept RMB deposits of RMB1 million (approx. US$128,000) or more.

  • WFOE or JV bank capital requirements

A WFOE bank or a JV bank must have a registered capital of at least RMB1 billion (approx. US$128 million) or equivalent in foreign currency. This is the same amount required for domestic commercial banks operating nationally, although more than a three-fold increase on requirements under the previous rules. A WFOE or JV bank establishing a branch must allocate non-refundable working capital of at least RMB100 million (approx. US$12.8 million) to each branch. However, the WFOE or JV bank may only allocate up to 60% of its capital to its branches.

  • Branch capital requirements

A foreign bank establishing a branch in China must allocate non-refundable working capital of at least RMB200 million (approx. US$25.6 million), double the previous minimum amount. A branch of a foreign bank is required to have non-refundable working capital of at least RMB300 million (approx. US$38.5 million) to engage in RMB business.

  • Loan ratio grace periods

WFOE and JV banks must comply with China's Commercial Banking Law, under which banks must maintain a loan-to-deposit ratio of 75% or less. Loans to the same borrower must be limited to 10% or less of capital. Various other ratios are also prescribed. In recognition of the difficulties that may result, the new regulations extend a five-year grace period for reducing the loan-to-deposit ratio and a three-year grace period for reducing loans to a single borrower.