Asia Focus

COUNTRY ANALYSIS UNIT

FEDERAL RESERVE BANK OF SAN FRANCISCO

MAY 2007

China’s New Foreign Bank Regulations

T

he promulgation of Regulations for the Administration of Foreign-Funded Banks on November

Corporation. The first steps to reopen the market were made when the Chinese government allowed foreign banks to establish representative offices in the early 1980s. Further opening occurred in 1985 with the passage of regulations that allowed foreign banks to engage in limited commercial banking operations in China’s Special Economic Zones. During this time, a few American banks re-established their operations in China, including among others Citibank, Bank of America, and American Express Bank. It was not until 1994 that foreign institutions were allowed to transact business through the country, but business had to be booked only in foreign currency. The provision of services in the local currency (renminbi –RMB) was restricted to only a few major cities, and banks could not offer RMB banking services to local residents. Handicapped by these restrictions, foreign banks in China saw their business stagnate relative to their domestic competitors. At year-end 1998, foreign banks in China had about the same aggregate assets (roughly $34 billion) as four of the leading joint-stock holding commercial banks (JSCBs), medium-sized lenders founded in the mid-1990s. Over the next seven years these four JSCBs, benefiting from more favorable regulatory treatment, saw an average annual growth rate of 33 percent, significantly higher than the 13 percent that foreign banks in aggregate achieved. By the end of 2005, the four JSCBs had witnessed a more than sevenfold increase in their total assets to $263 billion, while

11, 2006, marked the beginning of a new chapter for foreign banks in China. Foreign banks can now offer commercial banking services to any customer, regardless of their nationality, everywhere in China. The opening of the Chinese banking market,...