How Beijing Is Keeping Banks At Bay
Dec. 11, 2006, is meant to be a red-letter day for Chinese banking. That's when the mainland's finance sector is to be fully opened to foreign banks under commitments Beijing made when it joined the World Trade Organization. For years overseas financial houses have been preparing for the day, when they'll be allowed to offer a wide range of banking services to individual Chinese savers. All told, foreigners have spent more than $23 billion on stakes in 20 Chinese banks, dreaming of introducing mainlanders to credit cards, mortgages, and personal finance.
The reality may turn out to be far different. Western financial outfits are effectively fenced off from retail banking and insurance by rigid investment caps and regulations that make going solo frightfully expensive. And on Sept. 14, Beijing added rules barring new foreign investment in brokerages. Some say it's all part of a subtle strategy to open things up just enough to ward off a WTO legal challenge but introduce regulations that tilt things in favor of the home team. "China is in compliance with its basic WTO commitments, but it has created regulatory and procedural barriers that hinder full access," says James M. Zimmerman, an attorney with Squire, Sanders & Dempsey in Beijing.
In theory, foreign banks will be able to open branches from Hainan to Harbin. Yet few will do so because foreigners can open only one branch a year, and each branch must have operating capital of $50 million, a burden local banks don't face. Committing $500 million to open 10 branches in a decade doesn't make a lot of sense, so foreigners instead have bought equity stakes in local banks. The problem is that Beijing limits total foreign ownership in any Chinese bank to 25%, and any individual bank can hold just 20%. As minority shareholders, foreigners don't have much say in strategy. Last year, for instance, Bank of America Corp. (BAC ) spent $3 billion for 9% of China Construction Bank Corp. But the Americans have only one seat on the board and had to abandon their own mainland retail effort as part of the deal.
While WTO rules don't require China to offer foreigners majority control of local banks, that's the practice in Japan and Korea. Still, the Chinese show no signs of budging on the 25% investment cap. Citigroup (C ), which has ties to China dating to 1902, assembled a team of investors to bid $3 billion for more than half of Guangdong Development Bank, a troubled mainland lender. Although no decision has been made, the betting is that Beijing won't make an exception for Citi, and the Americans will have to settle for a 25% stake.
The barriers in financial services reflect a larger anti-reform trend. Beijing recently tightened regulations on foreign real estate transactions and has added limits on acquisitions by overseas investors, a strategy at odds with its past liberal policy on foreign investment. Also on Sept. 10, the government introduced rules barring financial information companies such as Reuters Group PLC (RTRSY ) and Bloomberg Financial Markets from selling their data directly to Chinese banks and brokerages. Instead, their news feeds will be vetted and distributed by a mainland rival, Xinhua. "A lot of the new regulations coming out seem to have a heavy economic protectionist component to them," says Michael H. Dardzinski, an attorney with San Francisco-based Orrick, Herrington & Sutcliffe in Beijing.
Beijing denies any effort to block access to its market. True, foreigners control just 2% of assets in the banking system. Nonetheless, China "remains committed to opening the financial sector in 2007," Finance Vice-Minister Li Yong said at a World Bank meeting in Singapore on Sept. 16. Adds Wang Yong, director of the Beijing University Center for International Political Economy: "The problem is, the U.S. banking sector is not patient."
By Brian Bremner and Dexter Roberts