China Banking Regulatory Update November 2013 Kreab Gavin Anderson is a leading communications consultancy with a global reach. We help our clients solve complicated and demanding communications issues that can have an impact on their futures. With operations in 25 countries and over 400 experienced consultants, we provide independent and strategic advice on high-stakes financial, corporate and public affairs communications. Our China Banking Regulatory Update offers a snapshot of the latest developments in China s bank regulatory environment. Sources include the websites of China s financial and banking regulators and news releases published through local publications. For more information on China s regulatory landscape and how it may impact your business, contact us today. Major banking policy developments in November included the signing of a currency swap agreement with the EU (p. 1), draft rules that tighten market entry requirements for foreign banking institutions (p. 2), the opening of China s new loan prime rate centralized quotation and issuance mechanism (p. 4), and the revelation of an upcoming program to test more liberal foreign exchange policies in the Shanghai FTZ (p. 4). 27 September: China s capital rules compliant with international standards Recently, the Basel Committee released a report on the alignment of China s capital regulatory regime with international capital regulatory standards. Overall, China was given a Compliant rating. Among the 14 capital regulatory categories measured by the report, China was judged to be Compliant in 12 and Mostly Compliant in two Standardized Approach and Disclosure Requirements. The Basel Committee said that, in the former measure, China employs a risk-weighting system that can vary depending on external credit assessments. In the latter measure, the Chinese system does not provide enough data about credit quality and securitization. 2 October: Xi Jinping calls for the creation of an Asian Infrastructure Bank In a meeting with Indonesian President Susilo Bambang Yudhoyono, Chinese President Xi Jinping called for the creation of an infrastructure bank designed to promote economic integration in Asia. Although no details about this proposal have been announced, Xi did say that China would be willing to take the lead in providing the financial resources needed to establish the new institution. The creation of a Chinese-led infrastructure bank would allow China to influence the international financial architecture on its own terms in contrast with its role in most other existing international institutions, in which Beijing must demonstrate significant flexibility. Consequently, the creation of an Asian infrastructure bank may become a topic of intense negotiation between China and other countries in the region, which may also seek a greater voice in international financial organizations. 9 October: China signs two major currency swap agreements Following State Council approval, on 1 October, the People s Bank of China (PBC) and the Bank of Indonesia signed a three-year bilateral currency swap agreement. The scale of the agreement was 100 billion yuan/175 trillion ringgit. Contacts: Robyn Joseph Partner, Hong Kong Email: rjoseph@kreabgavinanderson.com Thomas Patterson Executive Associate, Hong Kong Email: tpatterson@kreabgavinanderson.com
Eight days later, the PBC and the European Central Bank signed a 350 billion yuan/45 billion yuan euro currency swap agreement China s third largest after deals signed with Hong Kong and South Korea. The agreement is valid for three years and can be renewed with the consent of both parties. The deal is especially important in that it can provide liquidity to help Europe develop offshore yuan business lines. 9 October: Foreign banks face stricter China entry requirements Shanghai Securities Journal has published details of a draft amendment to the CBRC s Measures for the Implementation of Administrative Licensing Matters Concerning Foreign-Funded Financial Institutions. The measures establish new controls on foreign-funded and jointly funded banks and other financial institutions. In particular, they triple the minimum registered capital requirement for foreign-funded and Chinese-foreign joint venture banks from a minimum of 300 million yuan to a minimum of 1 billion yuan of paid-in capital. The measures also stipulate that those who wish to become shareholders in such institutions must have gained approval from financial regulators in their own countries. The shareholders must be financial institutions, and the controlling or only shareholder must be a commercial bank. Additionally, shareholders must not have any of the following characteristics: Defective governance or mechanisms; Complicated equity relationships or low transparency; Excessive affiliated institutions or connected transactions; Unclear core businesses or a scope of operations that includes too many industries; A liquidity situation that may be greatly impacted by poor economic conditions; A higher than average debt ratio or leverage; Serving as a proxy holder of shares in the bank; or Other traits that would have a negative impact. The measures also establish a much stricter environment for foreign financial institutions that engage in the derivatives business. The new measures stipulate that foreign capital banks that enter the derivatives trading business will be divided into Basic and Standard categories. Only Standard institutions can take part in non-hedging derivatives trading. Regulations related to other business lines have been refined as well, including for: Issuance of debt and supplementary capital tools; The credit card business; Foreign wealth management business lines; and Foreign wealth management custodian business lines. 11 October: London investors receive 80 billion yuan RQFII quota Following the fifth China-Britain Economic and Financial Dialogue, China has granted institutional investors in London an 80 billion yuan quota under the Renminbi Qualified Foreign Institutional Investor (RQFII) scheme. London institutions will now be able to invest offshore yuan in Chinese equities. London is now the second city outside of the Chinese mainland, after Hong Kong, to enjoy an RQFII quota. For London, this quota will be an important tool in its drive to become an offshore yuan center. 16 October: Central bank spokesperson again signals upcoming issuance of interbank deposit certificates Recently, the PBC has signaled that it will allow the issuance of interbank deposit certificates to expand the market pricing scope of debt products of financial institutions and set the groundwork for deposit rate reforms. 2
On 16 October, a central bank spokesperson repeated this intention, but emphasized the need to tread carefully. According to the spokesperson, loosening deposit rate controls is the most important and most risky stage of interest rate reform. To create the conditions for reform, the PBC will build a market interest rate self-regulatory mechanism and strengthen the market benchmark rate system, the spokesperson said. The spokesperson also commented on China s credit expansion and liquidity situations, saying that pressure to expand credit issuance is high, while liquidity is plentiful. He said credit support is strong for small and micro enterprises, agriculture and central and western areas. It is stricter for industries with overcapacity. 17 October: CBRC seeks greater support for new city residents The CBRC has issued a circular on improving financial services work for agricultural workers that calls on banking institutions to promote financial services to new migrants to cities. The circular also calls for overcoming difficulties in loan issuance to these migrant workers. The circular encourages financial institutions to perfect credit file building for migrants, build comprehensive communication and information exchange mechanisms with village committees and community service centers, and set up transparent credit review processes. Institutions should also take stock of the diverse loan needs of new city residents and develop products in line with those needs. This includes loans for employment, consumption, establishing businesses in the countryside, and overcoming temporary difficulties. A selection of financial tools should be offered, including deposit, loan, remittance, transfer, credit card, wealth management, information and consulting services. Additionally, to facilitate loan issuance, the circular calls for the expansion of service methods, including the establishment of service centers by village institutions outside of their localities and the provision of small loan funding guaranteed by work units to help workers in hardship or who temporarily do not have access to their salaries. Financial institutions should also simplify loan procedures, shorten approval times and reasonably determine loan maturities. 17 October: PBC reportedly developing market interest rate pricing mechanism According to industry insiders, the PBC is leading an effort to develop a market interest rate pricing mechanism. The mechanism, to be set by banks, will become China s prime rate reference benchmark. Compared to the Shanghai Interbank Offered Rate, the new mechanism will offer higher stability because banks will not change the prime rate based on short-term interest rate changes. There is speculation that any loans or large certificates of deposit based on this rate may be trialed in the Shanghai FTZ. 18 October: HK residents may gain more flexible yuan conversion Following a meeting with representatives of the State Administration of Foreign Exchange, Hong Kong Monetary Authority Chairman Norman Chan Tak-lam revealed that the PBC is weighing the possibility of abolishing the 20,000- yuan-per-day limit on currency conversion for Hong Kong residents. However, Chan noted that the 80,000-yuan daily remittance limit would remain unchanged. If the changes go forward, Hong Kong s yuan-denominated financial products may receive a boost because local residents will be able to purchase them more efficiently. 22 October: RQFII pilot extended to Singapore China and Singapore have agreed on several measures to expand bilateral cooperation in the financial sector. The two countries reached the agreements at the tenth meeting of the Joint Council for Bilateral Cooperation, attended by Chinese Vice Premier Zhang Gaoli, Singaporean Deputy Prime Minister Teo Chee Hean and PBC Deputy Governor Hu Xiaolian in Singapore. The measures include: 3
China will extend the Renminbi Qualified Foreign Institutional Investor pilot to Singapore, including a quota of 50 billion yuan. When conditions are right, Chinese investors will be allowed to invest in the Singapore market under the Renminbi Qualified Domestic Institutional Investor pilot; The two countries will promote direct trading of the yuan and the Singapore dollar; China supports the cross-border yuan business between Singapore and two China-Singapore projects Suzhou Industrial Park and Tianjin Eco-City; The two countries will deepen banking industry cooperation, strengthen regulatory cooperation and exchanges, deepen familiarity with international financial regulatory reform, and deepen cooperation in setting international financial regulatory rules; and China and Singapore will strengthen exchanges and cooperation in futures and derivatives product market development and regulatory methods, support bilateral cooperation between exchanges, build work mechanisms, and promote direct listing of Chinese companies in Singapore. The extension of the RQFII pilot to Singapore, combined with the recent extension of the pilot to London, means that Hong Kong will face ever-more-intense competition as a center for offshore yuan investment in Chinese equities. 24 October: HK banks may lift charges on inactive accounts The Hong Kong Monetary Authority has reportedly reached a consensus with local banks, which may eliminate charges on inactive accounts at the end of October. Currently, an account with less than HK$2,000 in it and that has not seen any activity in over one to two years is considered inactive. These accounts are typically charged HK$100 every six months until no money is left in the account. But, minimum deposit charges are not slated for lifting. These charges range from HK$50 to HK$60 per month for accounts with balances of less than HK$5,000. 24 October: PBC and the US FDIC sign an MOU PBC Governor Zhou Xiaochuan and Martin Gruenberg, Chairman of the US Federal Deposit Insurance Corporation (FDIC), have signed an MOU on behalf of their agencies. The MOU aims to strengthen information sharing, communication and policy cooperation in relation to bilateral financial services, deposit protection, resolution and recovery of cross-border financial institutions, crisis management, and policies on global financial stability. The MOU updates a version that was signed by the two sides in August 2007. 25 October: Loan prime rate centralized quotation and issuance mechanism officially begins operating China has begun to operate a new loan prime rate centralized quotation and issuance mechanism to replace the PBC s rate setting system. The prime rate will be set by the National Interbank Funding Center based on all but the highest and lowest of the quotations of nine major commercial banks, each of which must provide the rate that they charge their best customers. The launching of the new system may be a milestone in interest rate reforms because it will put in place the basis for measuring the real demand for credit in the market. It may play a role in transforming the Shanghai Interbank Offered Rate into a benchmark. The nine banks that submit quotations are Industrial and Commercial Bank of China, Agricultural Bank of China, Bank of China, China Construction Bank, Bank of Communications, China Citic Bank, Pudong Development Bank, Industrial Bank and China Merchants Bank. 29 October: PBC may trial more liberal foreign exchange policy in the Shanghai FTZ According to Caixin, the PBC is currently considering a pilot plan to let individuals and both foreign and domestic firms establish foreign exchange accounts in Shanghai s new FTZ. The account would be similar to an offshore account, and foreign exchange would be allowed to flow in and out without restrictions. 4
The newspaper quoted a source within the Shanghai government as saying that the purpose of the pilot would be to see how capital flows when there is no government intervention. Subsequent policies could be loosened or tightened depending on the result. Although the pilot has not yet been approved, Caixin's sources said that the participants had been chosen, including China's Big Four banks and seven Chinese and foreign companies. The small scale of the pilot supports the claim that this is only a test rather than a roll-out ready policy. 5