VZCZCXYZ0027
PP RUEHWEB

DE RUEHBJA #8200/01 2410748
ZNR UUUUU ZZH ZUI RUEWMCF5310 2410743
P 290748Z AUG 06
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC 0000
RUEATRS/DEPT OF TREASURY WASHINGTON DC
INFO CHINA POSTS COLLECTIVE
RUEHGV/USMISSION GENEVA
RUCPDOC/USDOC WASHDC

UNCLAS BEIJING 018200 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EAP/CM AND EB 
 
 
USDOC FOR ITA/MAC/AP/MCQUEEN 
TREASURY FOR OASIA/ISA CUSHMAN 
AND DOHNER 
STATE PASS CEA FOR BLOCKSTATE 
STATE PASS FEDERAL RESERVE BOARD FOR JOHNSON/SCHINDLER; SAN 
FRANCISCO FRB FOR CURRAN/LUNG; NEW YORK FRB FOR DAGES/CLARK 
STATE PASS USTR 
STRATFORD/WINTER/MCCARTIN/ALTBACH 
 
E.O. 12958: N/A 
TAGS: EFIN ECON EINV WTRO PGOV CH
SUBJECT: CBRC ASSISTANT CHAIRMAN'S AND BANKERS' VIEWS ON 
DRAFT ADMINISTRATIVE RULES FOR FOREIGN BANKS 
 
 
THIS MESSAGE IS SENSITIVE BUT UNCLASSIFIED.  PLEASE HANDLE 
ACCORDINGLY.  NOT FOR DISTRIBUTION OUTSIDE USG CHANNELS. 
 
SUMMARY AND COMMENT 
------------------ 
¶1. (SBU) SUMMARY: ON AUGUST 25, FINATT AND ECONOFF MET CHINA 
BANKING REGULATORY COMMISSION (CBRC) ASSISTANT CHAIRMAN WANG 
ZHAOXING TO DISCUSS DRAFT ADMINISTRATIVE RULES ON FOREIGN 
BANKS, WHICH WOULD IMPLEMENT CHINA'S WTO ACCESSION 
OBLIGATIONS IN THIS SECTOR.  WHILE WANG NOTED THE 
REGULATIONS ARE INTENDED TO PROVIDE NATIONAL TREATMENT 
BETWEEN CHINESE AND FOREIGN BANKS, HE ACKNOWLEDGED SOME OF 
THE CONCERNS RAISED BY FOREIGN BANKS AND COMMITTED TO REVISE 
THE REGULATIONS TO ADDRESS THEM. 
 
¶2. (SBU) SEPARATELY, FINATT SPOKE TO TWO FOREIGN BANKING 
EXECUTIVES WHO HAD REVIEWED THE REGULATIONS.  WHILE THEY HAD 
A FEW CONCERNS, BANKING CONTACTS WERE GLAD THE REGULATIONS 
HAD BEEN ISSUED EARLY AND THAT CHINESE REGULATORS ARE NOW 
SEEKING COMMENTS.  WHILE THE REGULATIONS GIVE FOREIGN BANKS 
A STRONG INCENTIVE TO ESTABLISH LOCAL SUBSIDIARIES WITH 
RELATIVELY HIGH CAPITALIZATION REQUIREMENTS IN ORDER TO 
CONDUCT RMB DENOMINATED SERVICES, THIS WAS NOT VIEWED AS A 
SIGNIFICANT BARRIER TO ENTRY OR EXPANSION FOR BANKS 
INTENDING TO ESTABLISH LARGE BRANCH NETWORKS.  END SUMMARY 
¶3. (SBU) COMMENT: THE REGULATIONS, HOWEVER, IMPEDE MARKET 
ACCESS FOR SMALLER BANKS OR THOSE SEEKING TO ESTABLISH 
SMALLER BRANCH NETWORKS, AND AS SUCH, FAVOR LARGE 
INCUMBENTS.  IN ADDITION, REQUIRING FOREIGN BANKS TO 
ESTABLISH SUBSIDIARIES AND THEN REGULATING ACTIVITIES BASED 
ON CAPITALIZATION, WHILE CONSISTENT WITH NATIONAL TREATMENT 
OBLIGATIONS, FAVORS DOMESTIC BANKS WHICH HAVE ALMOST ALL 
THEIR REGULATORY CAPITAL IN CHINA.  EVEN IF INDUSTRY 
CONCERNS ARE ADDRESSED, CONTACTS EXPECT THE TIME CONSUMING 
AND OPAQUE REGULATORY PROCESS TO SLOW ORGANIC EXPANSION OF 
FOREIGN-CONTROLLED BANKS FOR THE FORESEEABLE FUTURE.  END 
SUMMARY AND COMMENT 
 
DRAFT REGULATIONS 
----------------- 
 
¶4. (SBU) IN AN AUGUST 25 MEETING BETWEEN FINATT AND CBRC 
ASSISTANT CHAIRMAN WANG ZHAOXING, FINATT AND ECONOFF 
EXPRESSED THE UNITED STATES GOVERNMENTS INTEREST IN AND 
WILLINGNESS TO REVIEW AND COMMENT ON DRAFT ADMINISTRATIVE 
RULES.  WANG CONFIRMED THAT THE CBRC INTENDS TO COMPLETE THE 
REGULATIONS IN SEPTEMBER, WHICH WILL THEN ALLOW THE STATE 
COUNCIL TO ENACT THEM BY NOVEMBER 1.  WANG, WHO HAD ALSO 
PRESIDED OVER A MEETING BETWEEN CBRC AND FOREIGN BANKS THIS 
WEEK, SAID THERE WOULD BE AN OPPORTUNITY TO REVIEW THE 
REGULATIONS. 
 
¶5. (SBU) WANG ASSERTED CONSISTENCY BETWEEN THE REGULATIONS 
AND CHINA'S WTO COMMITMENTS, WHICH OFFER FOREIGN BANKS THE 
RIGHT TO CHOOSE THEIR LEGAL FORM OF ESTABLISHMENT.  THE 
DRAFT REGULATIONS, HOWEVER, GIVE BANKS A STRONG INCENTIVE TO 
INCORPORATE AS SUBSIDIARIES.  WANG NOTED THAT THE DRAFT 
REGULATIONS HAD BEEN HEAVILY INFLUENCED BY U.S. REGULATIONS, 
WHICH REQUIRE FOREIGN BANKS TO INCORPORATE TO QUALIFY FOR 
FDIC INSURANCE.  FINATT POINTED OUT THAT THE USG DOES NOT 
REQUIRE INCORPORATION IF THE BANK DOES NOT WISH TO TAKE 
INSURED DEPOSITS, AND SEEKS, AS ONE EXAMPLE, TO ESTABLISH A 
CREDIT CARD BUSINESS.  WANG RESPONDED THAT THE CBRC BELIEVES 
CREDIT CARDS WOULD BE "CLOSELY RELATED" TO RETAIL DEPOSITS 
IN CHINA. 
 
¶6. (SBU) FINATT RAISED THE CONCERN THAT BANKS WHICH HAD 
ALREADY BEEN APPROVED AS QUALIFIED FOREIGN INSTITUTIONAL 
INVESTORS (QFII) AND QUALIFIED DOMESTIC INSTITUTIONAL 
INVESTORS (QDII) MIGHT NO LONGER MEET REQUIREMENTS THAT THEY 
MANAGE A CERTAIN AMOUNT OF ASSETS (USD 10 BILLION FOR QFIIS) 
IF THEY INCORPORATED AS SUBSIDIARIES.  WHILE WANG STATED 
THAT ONE AIM OF THE REGULATIONS IS TO PROVIDE NATIONAL 
TREATMENT BETWEEN FOREIGN AND DOMESTIC BANKS, HE 
ACKNOWLEDGED THIS POTENTIAL PROBLEM AND SAID HIS AGENCY 
 
WOULD BE WILLING TO REVIEW THE ISSUE. 
 
¶7. (SBU) ON THE QUESTION OF WHETHER BANKS THAT SWITCH TO 
SUBSIDIARIES WOULD BE REQUIRED TO "RESET THE CLOCK" IN 
ESTABLISHING A THREE-YEAR FOREIGN EXCHANGE BUSINESS TRACK 
RECORD WITH TWO YEARS OF PROFITABILITY IN ORDER TO CONDUCT 
RMB DENOMINATED ACTIVITIES, WANG NOTED THAT THE "CBRC WILL 
GIVE POSITIVE CONSIDERATION TO THE FULL CONTINUITY OF THE 
BUSINESS."  (COMMENT: THIS SUGGESTS THAT ALTHOUGH THE CBRC 
WOULD NOT TIE ITSELF DOWN ON THE ISSUE, IT INTENDS TO GIVE 
ALREADY ESTABLISHED BANKS CREDIT FOR TIME SPENT OFFERING 
FOREIGN EXCHANGE RELATED SERVICES AS BRANCHES.  END 
COMMENT.) 
 
¶8. (SBU) IN RESPONSE TO FINATT'S QUESTION ON WHETHER LIMITS 
ON LENDING TO A SINGLE BORROWER APPLIED TO A SUBSIDIARY'S 
CAPITAL RATHER THAN THE CONSOLIDATED CAPITAL OF A BRANCH'S 
PARENT WOULD REDUCE THE AMOUNT OF LENDING BANKS COULD MAKE 
TO CORPORATE CUSTOMERS, WANG OFFERED THAT THE CBRC IS 
WILLING TO MAKE "SPECIAL ARRANGEMENTS" FOR LARGE COMMERCIAL 
BANKS SUCH AS CITIGROUP AND HSBC.  CBRC WOULD ALLOW THEM TO 
CREATE "BOOKING BRANCHES," FOR BOOKING LARGE EXPOSURES 
AGAINST THE CONSOLIDATED CAPITAL OF THE PARENT. 
 
FDI LIMITATIONS 
--------------- 
 
¶9.   (SBU) REGARDING FDI LIMITS FOR DOMESTIC BANKS, WANG 
REITERATED THAT THE CBRC WELCOMES FOREIGN STRATEGIC 
INVESTORS.  WANG ADDED THAT WHILE THE CBRC PLANS TO DEVELOP 
NEW REGULATIONS FOR M&A, HE DOES NOT FORESEE SIGNIFICANT 
CHANGES TO THE CURRENT LIMITATIONS ON FOREIGN OWNERSHIP OF 
CHINESE BANKS.  ON CITIGROUP'S BID FOR GUANGDONG DEVELOPMENT 
BANK (GDB), WANG SAID THAT A FINAL DECISION WOULD OCCUR 
"SOON" BECAUSE GDB DESPERATELY NEEDS FINANCIAL 
RESTRUCTURING.  FINATT NOTED THAT THE USG IS WATCHING THIS 
DEAL WITH GREAT INTEREST AND THAT TREASURY SECRETARY PAULSON 
IS ALSO COMING TO CHINA "SOON." 
 
PRIVATE SECTOR REACTION TO DRAFT REGULATIONS 
-------------------------------------------- 
 
¶10. (SBU) FINATT SPOKE SEPARATELY TO TWO FOREIGN BANKING 
EXECUTIVES WHO HAD REVIEWED THE DRAFT REGULATIONS.  THEY 
SAID THAT WHILE CONCERNS REMAIN, THE CBRC'S EFFORTS IN 
SEEKING INDUSTRY COMMENTS ARE PRAISEWORTHY.  THEY SAID THERE 
WOULD BE A STRONG INCENTIVE TO INCORPORATE; HIGH 
CAPITALIZATION REQUIREMENTS WOULD IN GENERAL NOT BE A 
PROBLEM FOR THOSE BANKS INTENDING TO ESTABLISH LARGE BRANCH 
NETWORKS.  THE CAPITALIZATION REQUIREMENTS MIGHT, HOWEVER, 
KEEP OUT SMALLER- AND MEDIUM-SIZED BANKS THAT SEEK TO 
ESTABLISH BOUTIQUE OPERATIONS. 
 
¶11. (SBU) IN THE VIEW OF THE FOREIGN BANKING EXECUTIVES, THE 
FIVE MAIN CONCERNS FOR FOREIGN BANKS ARE: 
 
(A) LIMITS ON LENDING TO A SINGLE BORROWER WOULD BE REDUCED 
AND APPLIED TO A SUBSIDIARY'S CAPITAL RATHER THE 
CONSOLIDATED CAPITAL OF BRANCH PARENTS.  THIS COULD REDUCE 
LENDING TO LARGE CORPORATE CLIENTS. 
 
(B) SOME FOREIGN BANKS HAD ALREADY QUALIFIED AS QFIIS AND 
QDIIS.  THERE WAS CONCERN THAT IF BANKS WERE REQUIRED TO 
INCORPORATE, THEY WOULD NO LONGER BE ABLE TO MEET THE 
REQUIREMENTS THAT THEY MANAGE A MINIMUM AMOUNT OF ASSETS 
(USD 10 BILLION FOR QFIIS). (COMMENT:  WHILE THE CSRC IN MID- 
AUGUST REDUCED THE MINIMUM REQUIRED MANAGED ASSETS FOR 
INSURANCE COMPANIES AND ASSET MANAGEMENT COMPANIES TO USD 5 
BILLION, IT LEFT REQUIREMENTS UNCHANGED FOR BANKS). 
(C) DRAFT REGULATIONS COULD BE INTERPRETED TO MEAN THAT ONCE 
BANKS CONVERTED TO SUBSIDIARIES, THEY WOULD NEED A NEW THREE- 
YEAR TRACK RECORD, WITH TWO YEARS OF PROFITABILITY BEFORE 
BEING ABLE TO OFFER RMB-DENOMINATED SERVICES. 
 
(D)  A SEPARATELY CAPITALIZED SUBSIDIARY MIGHT HAVE A LOWER 
CREDIT RATING, AND THUS A HIGHER COST OF FUNDS THAN ITS 
PARENT. 
 
 
¶12. (SBU) THE DRAFT REGULATIONS ALSO REQUIRE THAT A 
CONTROLLING SHAREHOLDER OF A FOREIGN BANK BE A COMMERCIAL 
BANK, WHICH REFLECTS THE GROWING POLITICAL SENSITIVITY TO 
RISING FDI FROM EQUITY AND HEDGE FUNDS, BOTH INSIDE AND 
OUTSIDE THE FINANCIAL SECTOR. 
SEDNEY