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RR RUEHCN RUEHGH RUEHVC
DE RUEHGZ #2317/01 3260918
ZNR UUUUU ZZH
R 220918Z NOV 06
FM AMCONSUL GUANGZHOU
TO RUEHC/SECSTATE WASHDC 5491
INFO RUEHOO/CHINA POSTS COLLECTIVE
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RHHMUNA/HQ USPACOM HONOLULU HI

UNCLAS SECTION 01 OF 02 GUANGZHOU 032317 
 
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E.O. 12958: N/A 
TAGS: EFIN WTRO ECON EINV CH
SUBJECT: New Foreign Banking Regulations: Foreign Bankers are 
Optimistic, Chinese Banks are Wary 
 
REFERENCE: Guangzhou 30413 
 
(U) This message is sensitive but unclassified.  Please handle 
accordingly. 
 
¶1. (SBU) SUMMARY: Following the November 15 release of banking 
regulations that permit wholly foreign-owned banks in China, 
Guangzhou-based representatives of foreign banks believe they can 
now operate on a level playing field with domestic banks.  Citibank 
and Deutsche Bank branch managers said their banks plan to 
incorporate locally in order to participate in full RMB business and 
issue credit cards.  Their optimism was tempered, however, by a 
belief that a slow-moving approval process will limit their ability 
to gain market share.  Chinese commentators expect a fierce battle 
between foreign and domestic banks and were critical of foreign 
banks' continued tax benefits.   END SUMMARY. 
 
New Banking Regulations: A Level Playing Field on Paper 
------------------------------------------ 
 
¶2. (SBU) Guangzhou branch managers for Bank of America, Citibank, 
and Deutsche Bank told Econoff that the foreign banking regulations 
issued on November 15, 2006, are generally the same as the draft 
regulations released earlier this year.  The regulations, which take 
effect December 11, 2006, allow foreign banks for the first time to 
create wholly foreign-owned enterprises (WFOEs) within China.  WFOEs 
will be permitted to engage in a full range of RMB business with 
local customers.  Foreign banks that do not incorporate locally will 
continue to be restricted geographically and limited to servicing 
bank accounts with deposits of RMB 1 million (USD 127,000) or more. 
 
 
¶3. (SBU) The new regulations also allow WFOE banks to issue their 
own credit cards, a service previously off-limits to foreign banks. 
The Bank of America, Deutsche Bank, and Citibank representatives all 
said this is a major opportunity for foreign banks to generate new 
profits and cited it as a primary incentive to incorporate locally. 
Bank of America's Yu said she expects to see new regulations 
governing the credit card market in the near future.  She also 
expects that China will soon establish a national system of deposit 
insurance, under which WFOEs (but not foreign branches) will be 
covered. 
 
Areas of Concern: Credit Ratings, Liquidity Ratios, Capital 
Requirements 
------------------------------------------ 
 
¶4. (SBU) Foreign banking representatives noted that a negative 
consequence of incorporating locally is the likelihood of a lower 
credit rating.  Deutsche Bank's Myron Shi said banks that handle 
derivatives will find this a serious concern.  However, none of the 
representatives considered this issue a major impediment, and 
Citibank's Milson Lau expects that the parent company's credit 
rating will be given primary consideration. 
 
¶5. (SBU) Bank of America's Julia Yu said the new regulations do not 
permit foreign banks to buy or sell government securities, which 
domestic banks can do.  She also noted that the liquidity ratio of 
25 percent that China is likely to impose leads to burdensome 
borrowing costs.  Deutsche Bank's Shi noted that foreign banks that 
choose not to incorporate will see an increase in their capital 
requirements from RMB 100 million (USD 12.7 million) to RMB 200 
million (USD 25.4 million). 
 
Implementation Will Be a Barrier 
-------------------------------- 
 
¶6. (SBU) Though the representatives said the new regulations level 
the playing field on paper, they all expect that long procedural 
delays by Chinese authorities will slow their ability to expand as 
quickly as they would like.  (NOTE: this is similar to what happened 
with the opening of China's insurance market.  End note.)  In 
addition, they are waiting for officials to clarify whether WFOEs 
would need two years of profit prior to opening new branches. 
Citibank's Lau said foreign banks are severely handicapped for local 
representation, particularly for residential banking in China, 
because of the extensive retail networks that domestic banks have 
already established.  (Septel addresses the Citibank-led deal with 
Guangdong Development Bank.) 
 
GUANGZHOU 00032317  002 OF 002 
 
 
 
Details Still to Come 
--------------------- 
 
¶7. (SBU) Banking representatives expect China's Banking and 
Regulatory Commission (CBRC) to issue detailed rules by December 11, 
when the five-year post-WTO accession transition period ends.  Areas 
that need to be addressed include the formulas for calculating 
asset/liability and liquidity ratios and the RMB/foreign currency 
ratio for branch capital requirements.  Deutsche Bank's Shi said he 
was pleased to see that the regulations do not include a 1 percent 
general provision requirement on loans, and is waiting to see 
whether it will be added in the CBRC rules.  The representatives are 
also hoping that CBRC does not impose limitations on the number of 
branches or sub-branches a WFOE may open. 
 
Who Plans to Incorporate? 
------------------------- 
 
¶8. (SBU) Though many banks will decide to incorporate locally, those 
that concentrate on corporate banking may decide not to change, 
according to the representatives.  The media has reported that 
Citibank, Standard Chartered, HSBC, Hang Seng, and Bank of East Asia 
intend to incorporate.  Deutsche Bank's Shi did not say whether his 
bank has made a decision, but said he believes that incorporating is 
the best strategy moving forward.  Julia Yu from Bank of America 
said incorporating makes good long-term sense from a business 
perspective, but acknowledged that Bank of America is limited in its 
options.  (Bank of America agreed not to engage in retail business 
for three years as part of its deal to purchase a nine-percent stake 
in China Construction Bank in 2005.) 
 
The Chinese Perspective: Giving Away Too Much 
------------------------------------------ 
 
¶9. (SBU) In an interview with the Southern Weekend weekly newspaper, 
a manager with China Merchants Bank complained that foreign banks 
enjoy preferential treatment.  He said WFOE banks will continue to 
enjoy a 15 percent tax while domestic banks pay 33 percent.  Foreign 
banks are given a two-year maturity period for interbank lending, 
compared with only four months for Chinese banks.  In addition, 
foreign banks' headquarters can offer a broader range of services 
than those of Chinese banks.  The article echoes a complaint by some 
Chinese banks that China is opening its banking industry faster than 
other countries.  It noted that China is a base of operations for 71 
banks from 21 countries, but Canada has only a dozen foreign banks. 
 
 
¶10. (SBU) In an article in the influential Southern Metropolis 
Daily, commentator Chen Jialin argues that, despite the new 
regulations, the high costs in setting up branch networks will lead 
many foreign banks to buy stakes in local banks instead.  He writes 
that in the short term foreign banks will target high-end customers 
with wealth management and credit card services.  He believes 
competition between foreign and local banks will become particularly 
fierce in late 2007 and early 2008 as foreign banks expand their 
networks. 
 
A Chinese Banker: Foreign Banks are Competitive 
------------------------------------------ 
 
¶11. (SBU) Yu Xiaoping, General Manager of the Shenzhen Branch of the 
China Development Bank (a policy bank under the State Council), said 
foreign banks could find considerable success in China in small 
loans and community banking, trade financing, and credit cards. 
Calling the new regulations a true leveling of the playing field, 
she criticized Chinese banks as being too focused on large projects 
and too hesitant to offer loans to small enterprises and 
individuals.  According to her, most Chinese consumers, if given the 
option, would choose to put their money in a foreign bank. 
 
ROCK