Financial Services in China the next big boom

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Financial Services in China the next big boom ?

• Richard Kimber

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• China Daily 7th Dec 2006
• China banks urged to widen offerings
• China Daily 12th Dec 2006
• Bank Regulator Issues Reform Guidelines
• Shanghai Daily 20th Jan 2007
• Foreign Banks ready for Retail

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• 11 Dec 2006 PRC Regulations on Administration
  of Foreign Funded Banks (FFBs).
• Key Points
• Effective 1 January 2007.
• FFBs can now offer RMB Services to PRC
  Nationals.
• iii) No geographical restrictions on where to
  conduct business may apply for licence in any
  Chinese city.

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• However, stringent qualification requirements
• The sole or controlling shareholder of a FFB must
  have total assets of US10 billion and has
  operated rep. Office for 2 years.
• Minimum paid up reg. Capital 1 billion Yuan
  (US126 million).
• (c) A foreign bank who wishes to establish a
  branch must have assets of US20 billion.
• (d) The foreign shareholder of a sino-foreign FFB
  to be a bank with assets of US10 billion and a
  rep. Office.
• (e) FFB branch may only receive a minimum
  1million RMB on time deposit from a PRC
  national.

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• Application procedures
• FFB / branch.
• Application letter.
• Feasibility study.
• Draft articles of association of proposed bank.
• Organisational chart.
• Annual reports for past 3 years.
• Anti-money laundering systems.
• Copies of financial services permits.
• Etc.
• Time Frame 6 months for initial CBRC approval
  then
• 6-9 months for bank to set up or initial
  CBRC approval is void.

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• Bank Rep Office.
• Popular strategy for smaller capitalised banks
  wishing to test the market and engage in liaison
  and marketing services.
• Also, will need to have operated a Rep. Office if
  seeking to later establish a sino-foreign bank in
  the PRC. No indication yet of maximum foreign
  shareholding in a sino-foreign bank.
• Application Procedures.
• Application Letter.
• Feasibility Study Report.
• Articles of Association of Foreign Bank
  Applicant.
• Annual Reports.
• CV of appointed Chief Representative.
• Time Frame 6 months after lodging application.

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• New Regulations controversial as effectively
  prohibits a FFB branch from offering retail bank
  services to PRC nationals.
• Breathing space for domestic banks to
• Improve corporate governance.
• Improve management and risks controls.
• Improve marketing and develop new investment
  products.

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What services can a FFB or Branch now offer

• Receive deposits from general public (Branch
  limitation min. of 1 million RMB)
• Grant short-term, medium term and long term loans
• Handle acceptance and negotiation of commercial
  instruments
• Buy and sell govt. bonds, financial bonds, buy
  and sell foreign currency securities
• Provide letter of credit services
• Buy and sell foreign exchange and act as agent.
• Act as agent for insurance companies
• Engage in inter-bank lending
• Provide bank card services (Branch not permitted
  to do so)
• Safe deposit services
• Credit information services

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Effect of new Regulations

• Offering of retail RMB services to PRC nationals
  therefore May June 2007 at earliest.
• Over nine foreign banks with existing PRC
  branches have applied for local incorporation
  applications will take 6 to 9 months to process.
  However detailed rules for procedures for
  conversion from a branch to local incorporation
  not yet passed.
• HSBC, Standard Chartered and Citibank market
  leaders.
• HSBC has identified over 16 Chinese cities in
  which to commence retail operations.
• Stringent capital requirements for local
  incorporation will mean some foreign banks with
  branch operations will look for strategic
  partnerships with local banks in the following
  areas

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Effect of new Regulations

• A. Credit Cards e.g BoCom and HSBC joint
  branded credit cards.
• B. Consumer Banking Products e.g mutual funds,
  private wealth management services.
• Insurance product marketing services with
  insurance companies,
• D. Investment and Management Alliances e.g
  equity stake in ICBC by Goldman Sachs, American
  Express and Allianz to improve corporate
  governance and develop banking, credit card and
  co-branded insurance products.

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Reality- Restrictions Remain

• Foreign Bank Branches are still treated as
  separate entities with
• costly capital requirements
• Limited RMB borrowing from Chinese banks
• Liquidity Requirements are high
• Restricted access to deposits (and refinancing)
  since branch networking
• is limited
• Difficult to access SOE loan clients (as state
  decides where to
• obtain loans from) i.e. Chinese banks
• Trade finance facilities of foreign banks are
  subject to extra registration
• as foreign debts

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Their Major Complaints

• 60 - Regulatory Environment
• 45 - High Prudential Requirements
• 45 - Licensing Restrictions
• 25 - Ownership Restrictions
• 20 - Recruiting and retention of staff
• 25 - Other
• Source EU China survey 2006

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Conundrum

• Same Survey
• What is your preferred mode of expansion?
• 48 - setting up a network of wholly owned
  branches
• 30 - acquisition of stake in Chinese bank
• 22 - strategic partnership

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In anticipation of competition

• Now seeing local banks obtaining permission
• to operate
• Insurance joint ventures
• Financial leasing companies (new law in pipeline)
• Mutual fund products
• Credit card operations
• by end of 2002 there were 500 million bank
  cards in circulation of which only 0.3 were
  credit cards
• The opportunities are enormous as credit card
• and insurance product use is still low.

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CIRC Directive 15 June 2006

• Insurance companies and entrusted banks to expand
  cooperation to include online banking, credit
  cards and corporate banking, as well as to
  explore non-counter sales models such as special
  wealth management counters and telemarketing.
• The Notice provides that agency handling charges
  for entrusted insurance business shall be clearly
  indicated in cooperation agreements signed
  between insurance companies and entrusted
  commercial banks.

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Tang Shuanging, Vice Chairman of the China
Banking Regulatory Commission (CBRC) Chinese
commercial banks lag far behind their
international counterparts in terms of financial
innovation Non interest income accounts for
more than 50 of total income of foreign banks
but Chinese banks the average is closer to
10.. Acknowledgment at the highest level of
the need for the Chinese banks to widen their
financial product offerings.
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Electronic Banking

• Measures for Administration of Electronic Banking
  Business and Guidelines on E-banking security
  Evaluation.
• Recognised need for CBRC monitoring of
  e-banking activities.
• Applicable to FFIs and domestic banks.
• Applies to operation of Online Banking,
  Telephone banking and Mobile Phone banking.

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Electronic Banking

• Applicants
• sound governance and internal risk management
  controls.
• set up and tested infrastructure and operating
  system.
• carried out independent security assessment.
• established separate electronic banking business
  dept.
• FFI must have existing commercial entity in PRC
  to offer these services.

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Of note

• After approval is granted for the conduct of
  e-banking the development, construction, support
  and maintenance is permitted to be contracted out
  to third party service providers.

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Of note

• Regulations are applicable to all types of
  financial institutions, asset management
  companies, trust and investment companies,
  financial leasing companies etc.
• Very few if any FFIs have been granted
  permission at this time to offer local e-banking
  services although a number of applications are
  pending.

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Investment Opportunities

• Foreign companies wanting to participate in
  online banking services or
• online securities brokerage or internet financial
  information services
• Measures for Administration of Internet
  Information Services promulgated in September
  2000, providers of "business-oriented Internet
  information services"
• (i.e. provision of information to online users
  via the Internet for compensation)
• must also satisfy the requirements to be a
  value-added telecommunications service provider
• ("VAS provider").
• ii. The Ministry of Commerce's Foreign Investment
  Industrial Guidance Catalogue and
• the attached Telecoms Services Catalogue (the
  "Catalogue"),
• Which set outs business sectors open to foreign
  investment, basic services
• public transmission of data and basic voice
  telephony services) and value
• added services (information services provided
  using the public network infrastructure).
• However, each application has to be looked at on
  a case by case basis.

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QUALIFICATION REQUIREMENTS

• Value added internet based financial information
  services up to 50 foreign ownership
• Register with local government IT bureau
• Changes to type of web content or business scope
  requires approval
• Find appropriate JV partner
• Monitor web content and third party advertising

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Overview

• Foreign Invested Funds Management
• CSRC Supervision
• Maximum 49 foreign shareholding
• Reg Capital RMB 300 million
• Foreign Shareholder Qualifications
• A financial institution with financial assets
  management experience
• Lawfully established in home country
• Paid in capital of RMB 300 million
• Country of investor has developed securities laws
  and regulatory system

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Overview

• 15 June 2006 CSRC passed corporate governance
• regulations on fund management companies
  conduct
• of business and rights of unit trust holders
• Strong growth of industry in 2006 and more
• predicted in 2007

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Automobile Finance Companies CBRC
Supervision Qualifications of Foreign Investor
Non-financial institution total assets of 4
billion RMB and annual business income of not
less than 2 billion RMB Non-bank financial
institution registered capital of not less than
RMB 300 million or equivalent in foreign
currency. Profitable for preceding 3 years
prior to application. Minimum Reg. capital
of RMB 500 million Senior Management familiar
with automobile finance business. Sound
organizational structure, management systems and
control systems. May borrow funds from other
financial institutions, receive deposits from
shareholders and engage in guarantee services.
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Financial Leasing Companies New
Developments Wholly foreign owned financial
leasing companies permitted since mid 2006.
Reg. Capital reduced to US 10 million or
RMB equivalent. Qualifications of
Investor Management team with professional
knowledge of financial leasing Management
systems and risk controls Business premises
and safety measures and other facilities for
operations
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• On the Horizon
• New Financial Leasing Law
• Still a Draft law (should come out early 2007)
• a) establishment of finance leasing companies
• b) policies to encourage future development of
  finance leasing activities.
• Domestic and Foreign Invested Companies to be
  treated equally
• Law will not be applicable to finance leasing
  contracts not
• governed by PRC law.
• Domestic banks will be able to establish or
  invest in financial leasing
• companies but will foreign banks?
• Reg. Capital is lowered to RMB 50 million
• (US 6.4 million)
• Will assist SMEs who do not have financial
  means to purchase equipment.

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Other opportunities for service
providers a. Data processing centres
(Predicted increase of credit card business will
rise from 4 of a banks profit up to 14 in next
5 years) Query may need to improve privacy
legislation in the PRC vs. public security
laws b. Financial Recruitment Services c.
Financial and Insurance Product Design d.
Financial website Design and maintenance e.
Outsourcing of bank customer and credit card
loyalty programmes and direct mailing
services. f. Outsourcing of online banking
services g. Credit Reporting and Credit
Assessment Agencies
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Projections

• After 2007, the impact of WTO entry will become
  obvious.
• Competition in the markets for the fastest
  growing segments
• Mortgages
• Automobile financing
• Mutual Funds Management
• Finance leasing
• Credit Cards
• Education Loans

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Thank You !
Richard Kimber E-mail rkimber_at_rhklegal.cn
Tel. [phone] Fax [phone]