2014 November of the year 27th of the month On [date], Premier Li Keqiang signed a State Council decree promulgating the "State Council Decision on Amending the Regulations on the Administration of Foreign-funded Banks of the People's Republic of China," which will take effect as of January 1, 2015. Recently, officials from the Legal Affairs Office of the State Council and the China Banking Regulatory Commission answered reporters' questions regarding amendments to the "Regulations on the Administration of Foreign-funded Banks of the People's Republic of China" (hereinafter referred to as the "Regulations").

     Q: Why is the regulation being amended?

     Answer: The regulation was issued by the State Council in 2006. The regulations promulgated and put into effect this year clearly stipulate matters such as the establishment and registration of foreign-funded banks, their business scope, and supervisory management. In particular, these regulations set relatively stringent conditions for the entry of foreign-funded banks and for the commencement of RMB-denominated business. Practice has shown that the implementation of these regulations has played a positive role in strengthening and improving the supervisory management of foreign-funded banks and promoting the sound operation of the banking sector. Foreign-funded banks have become a valuable complement to China’s banking system.

     The Third Plenary Session of the 18th CPC Central Committee proposed expanding both the domestic and foreign opening-up of the financial sector. After careful study and assessment, the China Banking Regulatory Commission, together with relevant authorities, believes that deepening the opening-up of the banking sector will help better harness the positive role of foreign-funded banks, promote further integration between domestic and foreign financial sectors in terms of capital, technology, products, and management, enhance the efficiency of financial resource allocation, and elevate the service and management standards of China’s banking industry. To meet this need and in accordance with the central government’s requirement that major reforms must be grounded in law, it is necessary to make corresponding amendments to the regulations.

     Q: What is the main focus of this revision to the regulation?

     Answer: This revision of the regulations, in the context of comprehensively deepening reform, proactively introduces further opening-up measures for foreign-funded banks. The key focus of the revision is to appropriately relax the entry and operation requirements for foreign-funded banks conducting RMB business—based on the actual conditions of their establishment and operations in China—while ensuring effective regulatory oversight. This will provide a more flexible and autonomous institutional environment for foreign-funded banks to set up and operate.

     Q: What conditions have been relaxed regarding the entry of foreign-funded banks?

     Answer: There are two key aspects: First, the minimum amount of operating capital that must be unconditionally allocated by the head office to branches established in China by wholly foreign-owned banks and Sino-foreign joint venture banks is no longer specified. Previously, the regulations stipulated that branches of wholly foreign-owned banks and Sino-foreign joint venture banks established in China must receive from their head offices an unconditionally allocated operating capital of no less than 100 million RMB or its equivalent in freely convertible currency. With the removal of this quantitative restriction, wholly foreign-owned banks and Sino-foreign joint venture banks can now effectively allocate operating capital among their branches according to their actual business needs. At the same time, the regulations continue to require that the total amount of operating capital allocated by wholly foreign-owned banks and Sino-foreign joint venture banks to their various branches shall not exceed 60% of the head office’s total capital. The existing regulations remain unchanged. The CBRC will continue to enforce capital supervision over foreign-funded corporate banks in accordance with the law and urge them to establish capital constraint mechanisms that are commensurate with their operational conditions and risk-taking levels. Second, the requirement that a foreign bank (or foreign financial institution) must first establish a representative office within China before setting up a wholly foreign-owned bank, a Sino-foreign joint venture bank, or a branch of a foreign bank in China for the first time is no longer in effect. With the removal of this requirement, foreign banks (and foreign financial institutions) establishing commercial entities in China will be free to decide independently whether to set up a representative office first. If they choose to establish a representative office, such office must comply with the relevant provisions of the Regulations.

     Q: What are the changes in the requirements for foreign-funded banks’ operational entities applying to conduct RMB business?

     Answer: According to the original provisions of the regulations, commercial branches of foreign-funded banks applying to conduct RMB business must meet three conditions, including: having been operating in China for more than three years prior to submitting the application; and having... Continuous annual profitability; and other prudential requirements stipulated by the banking regulatory authority under the State Council. This revision significantly relaxes the above-mentioned conditions, reducing the requirement for years of operation within China from 3... The requirement has been changed from “more than one year” to “one year or more,” and the previous stipulation that applicants must have achieved continuous profitability for the two years immediately preceding the application has been removed. Furthermore, if a branch of a foreign bank has already been approved to conduct RMB business, other branches of the same foreign bank established within China will no longer be subject to any time restrictions when applying to conduct RMB business. As a result, commercial entities of foreign-funded banks that are willing to do so can apply more conveniently and in a shorter timeframe to engage in RMB business, thereby better serving both “bringing in” and “going out” initiatives.