The People's Bank of China (PBOC) promulgated the new Provisional Measures of the Administration of Foreign-Funded Financial Institutions in Shanghai-Pudong Conducting Renminbi Business Pilot Scheme (the Measures) on December 2 1996. About a month later, the PBOC granted licences to Citibank, Bank of Tokyo-Mitsubishi, Hongkong Bank and Industrial Bank of Japan to conduct Renminbi (Rmb) business.
Under the Measures, foreign-funded financial institutions can operate in Rmb business relating to deposits, loans, settlements, guarantees, government bonds and financial bond investments, and other approved Rmb business, upon obtaining approval from the PBOC. However, it is believed that such business will have limited scope and may not place foreign-funded financial institutions in direct competition with domestic PRC banks and financial institutions. For example:
- Deposits: deposits may only be taken from foreign investment enterprises, foreigners and non-foreign funded investment enterprises relating to loans made by foreign-funded financial institutions.
- Loans and guarantees: foreign-funded financial institutions may only extend Rmb loans and provide Rmb guarantees to i) foreign investment enterprises and ii) non-foreign funded investment enterprises which received foreign exchange loans from foreign-funded financial institutions.
- Finance company restrictions: joint venture finance companies and wholly foreign-owned finance companies may only accept deposits of Rmb1 million (US$120,000) or more for a term exceeding six months.
- Ratio of Rmb to foreign currency liabilities: Rmb liabilities of foreign-funded financial institutions will not be allowed to exceed 35% of their total foreign exchange liabilities.
In addition, foreign-funded financial institutions must meet some basic requirements before and during operations, including:
- Term of operation: each foreign-funded financial institution must have operated in China for three years, with a two-year consecutive profit record before application.
- Foreign exchange loan balance: foreign bank branches operating in China must have a foreign exchange loan balance averaging at least US$150 million at the end of every month; for joint venture banks, joint venture financial companies, wholly foreign-owned banks and wholly foreign-owned finance companies, the amount of the foreign exchange loan balance must average US$100 million or more at the end of every month, and constitute at least 50% of their gross foreign exchange assets.
- Working fund capital injection: foreign-funded financial institutions must increase their working funds by the equivalent of Rmb30 million or more for conversion into Rmb.
- Deposit reserve fund: an Rmb deposit reserve fund must be kept at the PBOC branch in Shanghai at the ratio set down by the PBOC rules and regulations.
- Separating foreign currency accounts: foreign-funded financial institutions must establish a separate account book in Rmb which shall be settled independently from the foreign currency accounts.
- Supervision: the PBOC will manage and supervise the use of foreign exchange and Rmb by foreign-funded financial institutions. It has been reported that the PBOC will regulate such Rmb business in accordance with the regulations for domestic banks.
In addition, foreign bank branches as well as joint venture banks and wholly foreign-owned banks will be permitted to borrow short-term Rmb loans from the PBOC "if necessary". At present, such short-term loans from the PBOC are only available to local banks.
There are also reports that the first batch of approved banks will have to move their Shanghai headquarters from the old city centre to Pudong, on the outskirts of Shanghai, which is being transformed into an economic and financial centre, before starting Rmb business. The Shanghai branches of these approved foreign banks may remain open as a sub-branch of the new Pudong headquarters. The Measures do not, however, stipulate that the headquarters for the Rmb business of 'foreign-funded' financial institutions must be in Pudong.
Florence M Li and Grace Leung