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21 Int'l Fin. L. Rev. 55 (2002)
Why China's Regulations are Stalling Foreign Banks

handle is hein.journals/intfinr21 and id is 235 raw text is: China's politicians have promised to open banking and finance markets further as a condition of joining the World Trade Organization, and revised regulations reflect China's commitment to do so. But several provisions threaten to slow the expansion of foreign and foreign-invested banks and finance companies. Lester Ross of Paul, Weiss, Rifkind, Wharton & Garrison, Beijing, explains why Why China's regulations are stalling foreign banks Foreign banks and finance companies have established a modest presence in China. As of year-end 2001, foreign banks had established 190 business organiza- tions, including 158 branches of foreign banks with total assets of S45.2 billion, in addition to 214 repre- sentative offices, which are not allowed to engage in business. Penetration of the China market has been impeded by unclear and non.prudential restrictions on the establishment of a presence in China and regulatory limitations on the kinds of businesses in which they may engage and the types of customers whom they may serve. China committed to gradually open its banking and finance markets to foreign investors as a condition of its World Trade Organization (WTO) accession, including the elimination of non-prudential restrictions and the relaxation of controls on the conduct of renminbi business and business with Chinese customers. Revised regulations issued in December 2001 and January 2002 reflect China's commitments in this regard but include several provisions that promise to slow the expansion of foreign and foreign-invested banks and finance companies in China. The regulations and WTO The State Council approved the Regulations of the People's Republic of China on the Administration of Foreign-Invested Financial Institutions on December 12 1991, with effect from February 1 2002. The Regulations replace the 1994 document of the same name and were needed to implement the banking services component of China's WTO accession obligations, but also incorporate several other changes. Less than two months later, the Implementing Regulations for the Regulations of the PRC on the Administration of Foreign-invested Financial Institutions were promulgated on January 29 2012, also with effect from February 1 2002. The Implementing Regulations replaced five sets of regulations governing foreign-invested financial institutions. Like the 1994 Regulations, the new Regulations apply to foreign-invested banks and finance companies in the PRC, which are regulated by the People's Bank of China (PBoC). Foreign-invested banks may be established as wholly foreign- owned banks, branches of foreign banks or Chinese-foreign equity joint venture banks with 25% minimum foreign investment. Foreign-invested finance companies may be estab- lished as wholly foreign-owned finance companies or Chinese- foreign equity joint venture finance companies with 25' minimum foreign investment. So, the Regulations do not apply to the increasing number of financial institutions, such as Bank of Shanghai and Nanjing City Bank, organized as companies limited by shares with foreign ownership below the 25% joint venture threshold. Nor do the Regulations apply to foreign investment in other types of financial institutions, such as insurance companies, fund management companies and securities companies, which are governed by separate regulations and subject to supervision by different regulatory bodies. As of year-end 2001, foreign banks had established 190 business organizations, including 158 branches of foreign banks with total assets of $45.2 billion China's WTO commitments with respect to banking were the elimination upon accession of geographic restrictions on foreign currency business and a progressive removal of geographic restrictions on renminbi business within five years after accession. Engagement in renminbi businesses had already been allowed on a selective basis in Shanghai and Shenzhen. Under China's WTO Schedule of Specific Commitments on Services, foreign-invested financial institutions are eligible to participate in renminbi business if they have engaged in business operations in China for three years and such operations have been profitable for two years. These conditions are reflected in Article FLR Anril (Y) m wwwifircom z-

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