The regulatory regime applicable to banks
Companies planning to conduct banking business or the business of taking deposits in the PRC are required under the PRC Law on Regulation and Supervision over Banking Industry (Banking Regulation Law) to be approved by the CBIRC.i Main regulatory body
The CBIRC was formed via the merger of the CBRC and the China Insurance Regulatory Commission (CIRC) as part of the efforts of the central government to improve the efficiency of financial regulation and eliminate regulatory arbitrage. The CBIRC is responsible for drafting and promulgating the rules and regulations governing the banking and insurance sectors in China. It also examines and oversees banks and insurance companies, collects and publishes statistics on the banking system, approves the establishment or expansion of banks, and resolves potential liquidity, solvency or other problems that might occur to individual banks.
The CBRC (now the CBIRC) was founded in 2003 to play the role of supervisor and regulator in the banking sector, which role previously was performed by the PBOC. Nonetheless, the PBOC still has considerable influence over the PRC banking system. Aside from the typical central bank responsibility of monetary policy and representing the PRC in international forums, the PBOC is also in charge of reducing overall financial risk and promoting the stability of the financial system. Its supervision over interbank markets, foreign exchange markets, the payment and settlement system and the credit information system interim is crucial to the operation of banks in the PRC. Moreover, according to the Statement on the State Council's Institutional Reform Plan (2018), some authorities for drafting key regulations and prudential oversight of banking and insurance companies has been transferred from the CBRC (now the CBIRC) to the PBOC.ii Banking regulation structure
The PRC banking regulation structure is three-tiered.
At the top level sits legislation enacted by the National People's Congress, including Banking Regulation Law (2006), People's Bank of China Law (2003) and the Law of the PRC on Commercial Banks (2015) (Commercial Banks Law). Further important regulations concerning foreign banks were formulated by the State Council, namely the Regulations on Administration of Foreign-Funded Banks (2015) (Foreign-Funded Banks Regulations). The then-CBRC (now the CBIRC) subsequently issued interpretive rules to implement these Regulations.
The second tier consists of regulatory policies issued by the CBIRC, which reiterate the legislative principles set out in the legislation enacted by the National People's Congress and the State Council. A range of policy matters were addressed by the then-CBRC. These are guidelines to the CBIRC's regulatory and supervisory directions over the medium to long term. The medium-term goal of the CBIRC focuses on a prudential framework, whereas the long-term goal is to establish a fair and competitive market.
The third tier consists of the CBIRC's guidance, notices and rules. Most of the CBIRC's regulatory rules fall into this category. As China finds specific measures more helpful than a principles-based approach, the guidance, notices and rules are prescriptive in content and abundant in number. In general, the third tier of regulatory rules serves as the bottom rung of China's banking regulations, and deals with contemporary regulatory issues.iii Licensing of banks
In terms of licensing, banks in the PRC are divided into two general categories: Chinese-funded banks and foreign-funded banks. The division is based on the status that the individual bank gained at its establishment. In other words, if foreign investors buy into an established Chinese-funded bank as promoters or strategic investors, that bank would keep its original status as a Chinese-funded bank in respect of its supervision and regulation by the CBIRC.Licensing for Chinese-funded banks
Commercial banks in the PRC are primarily governed by the Commercial Banks Law, and are licensed to undertake banking activities by the CBIRC or its local counterparts. To implement licensed bank activities, the CBIRC has promulgated the Implementing Measures for Administrative Licensing Matters Related to Chinese-funded Commercial Banks (Chinese-funded Commercial Banks Measures), which apply to the six aforementioned biggest commercial banks, joint-stock commercial banks, urban commercial banks and the like, and the Implementing Measures for Administrative Licensing Matters Related to Rural Small and Medium-sized Financial Institutions, which apply to rural commercial banks, rural cooperative banks, rural credit cooperatives, county banks, etcetera. According to these two sets of measures, the establishment, transforming or termination, and the business scope, of a commercial bank, as well as of its domestic and overseas branches, are subject to the approval of the CBIRC or its local counterparts. If a commercial bank intends to raise or issue debts and capital supplement instruments, or operate foreign exchange business, derivative products transaction business, credit card business, offshore banking business and other business, it shall seek approval from the CBIRC or its local counterparts separately. The PBOC's approval is required if commercial banks intend to conduct the business of settlement and sale of foreign exchange.Licensing for foreign-funded banks
According to the Foreign-Funded Banks Regulations, foreign financial institutions are allowed to establish wholly foreign-owned banks or Sino–foreign joint venture banks in the PRC, provided the sole or major foreign investor is a commercial bank with no less than US$10 billion of assets and meets the prudential requirements as specified by the CBIRC. Foreign commercial banks are also allowed to establish branches, subsidiaries and representative offices in the PRC in accordance with different prudential requirements as specified by the CBIRC. For example, to establish branches in the PRC, a foreign commercial bank shall have no less than US$20 billion of assets, and shall meet other prudential requirements as specified by the CBIRC.
Similar to Chinese-funded banks, foreign-funded banks shall obtain the CBIRC's approval for its establishment, any changes to its shareholders and business scope, and its termination. Foreign-funded banks shall seek separate approval from the CBIRC for debts and capital supplement instruments issuance, yuan business, derivative products transaction business, credit card business and other business, and shall seek separate approval from the PBOC for the business of settlement and sale of foreign exchange. However, foreign banks' branches are excluded from conducting agency collection and payment, credit card business and yuan business towards Chinese citizens, except absorbing fixed-time deposits from Chinese citizens in an amount of no less than 1 million yuan. The representative offices are only allowed to engage in non-business operations related to the foreign banks represented by such offices, such as liaison, market survey and consultation activities.iv Securities activities
The Chinese bond market is now one of the largest in the world (only second to the US), with an estimated US$12 trillion as at June 2018. The China interbank bond market (CIBM) was established on 6 June 1997. It is the market for securities trading and repurchasing for institutional investors (including commercial banks, rural credit unions, insurance companies and securities companies). The interbank bond market comprises the China Foreign Exchange Trading Center, the National Inter-bank Borrowing Center and the Central National Debt Registration and Settlement Company. The PBOC is the supervisory body of the CIBM.
Six major kinds of bonds are available in the inter-bank bond market:
- treasury bonds issued by China's Ministry of Finance;
- bonds issued by the PBOC;
- policy bank bonds issued by policy banks;
- financial bonds, including commercial bank bonds and non-bank financial institution bonds;
- corporate bonds issued by non-financial enterprises, commercial paper and medium-term notes;
- other types of bonds such as local government bonds issued by provincial or city governments, asset-backed securities and foreign bonds issued by foreign entities.
Financial institutional issuers such as policy banks, commercial banks, finance companies and financial institutions with legal person status within the territory of China need to obtain approval from the PBOC to issue financial bonds. Foreign banks' branches allowed to engage in yuan business upon approval of the PBOC are also qualified to engage in debt trading in the CIBM.
Foreign institutions incorporated outside of China are also permitted to issue bonds, also called Panda bonds, subject to the fulfilment of certain conditions and requirements. The government has further loosened the thresholds for foreign issuers by issuing new Panda bond measures in 2018. Currently, all types of issuers (except for financial institutions) are only required to apply for registration with the National Association of Financial Market Institutional Investors (NAFMII), a self-regulation body. On the other hand, overseas financial institutions are subject to stricter requirements when issuing Panda bonds, and have to meet demands set out in the new Panda bond measures.