02 November 2006

Foreign Bank Restrictions in China

The Globe and Mail, Geoffrey York, 2 November 2006

With less than six weeks left before a deadline for China to open itself fully to foreign banks, there are growing signs that it will continue to clamp limits on foreign investment -- including Canadian -- in the banking sector.

Canadian business leaders are concerned that the restrictions will remain in place after the Dec. 11 deadline, despite China's pledge to open the banking sector on the fifth anniversary of its entry to the World Trade Organization.

Four of the five big Canadian banks -- all except Toronto-Dominion -- are active in China today. But analysts do not expect the country to fulfill its promise to lift all restrictions on foreign banks by Dec. 11.

"China has made strides forward, but they need to do more in the banking and financial services sector," said Sergio Marchi, the former Canadian trade minister and WTO ambassador, who heads the Canada-China Business Council. "We've got to address these issues and whittle them down."

Mr. Marchi is meeting a top Chinese banking regulator today to pursue the concerns of the Canadian banks. He is worried by early drafts of planned regulations on foreign licences for retail banking in China. "What's of concern to me is that we haven't seen the final criteria for applying for those licences," Mr. Marchi said in an interview in Beijing yesterday. "We don't know what those criteria are."

Under the early drafts of the new regulations, foreign banks might be required to seek local registration for each new branch that it opens, he said. This would impose much greater reporting requirements on the banks, and only the very biggest foreign banks might have the capacity to comply, Mr. Marchi said.

William Downe, chief operating officer of the Bank of Montreal, predicted that it might take years before China fully lifts its restrictions on foreign banks. Because of these restrictions, BMO would be limited to opening just 20 new branches across China each year, and this would make it impossible to compete with Chinese banks that have thousands of branches, he said.

"If we chose to expand, the only path would be through acquisition," Mr. Downe said during a visit to Beijing yesterday. "Obviously today you couldn't make an outright acquisition. The banking authorities don't appear to be prepared to approve anything of that nature."

Foreign investors have spent $23-billion (U.S.) to acquire stakes in Chinese banks in recent years, but China has limited them to minority holdings -- often without even a seat on the board of directors.

Foreign banks have also complained that they are prohibited from setting up an independent system of electronic payments for the credit and debit cards that they issue to their customers. Instead they are forced to go through the Chinese monopoly, China UnionPay, which is owned by Chinese banks.

"As we expand our customer base in China, that [electronic payment] capability will be more and more important, and it would be a frustration if those constraints continue," Mr. Downe said.

Another restriction would limit foreign investments in brokerages. But this restriction is a "short-term hold" and should be lifted by the middle of next year, Mr. Downe said. For now, the Chinese restrictions do not pose a major problem for BMO, he said, since the company is focusing on investment banking in China, rather than retail banking. It operates a retail banking operation in Beijing, but it still has less than a dozen employees.

"We don't think the constraints will endure," Mr. Downe said. "I don't think it will have a big impact on our business. If they miss the Dec. 11 commitment, I think they'll be in compliance within a year or two, and the frustration of our ambitions will be limited. There will be a moment when the constraints on ownership will come off and we'll have an opportunity to own a larger portion of entities that we're investing in."