New rules promote market competition

The State Council released revised regulations pertaining to the administration of foreign-funded banks recently. These new rules lower the threshold for foreign-funded banks to establish subsidiaries in China. They also loosen earlier restrictions on renminbi business by foreign-funded banks in the country.

Foreign banks have expanded slowly in China over the years thanks to restrictions on bank capital and renminbi transactions. Such barriers have virtually crippled the competitiveness of overseas institutions and greatly weakened their market share. Recent amendments though could lead these banks out of the woods. Firstly, rules requiring foreign banks to share operating funds with their locally owned branches have been abolished. Secondly, foreign banks can apply to start renminbi operations in China one year after opening in the country - in the past, a three-year wait was mandatory. Also, if one Chinese branch of a foreign-funded bank is allowed to conduct renminbi business, then all other branches will automatically qualify to do the same, without regard for the one-year waiting period.

These loosened regulations are expected to expose Chinese banks to a new level of competition, since their foreign competitors can now start operating more easily in areas of the local market which had previously been restricted to them. Still, further work must be done to promote a level playing field for all banks.