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How does a foreign investor set up a financial institution in the PRC?

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How does a foreign investor set up a financial institution in the PRC?

2. Commercial Banks

Set out below are the types of commercial banks that can be funded by foreign investment.

A. Definition

According to the Regulations of the People’s Republic of China on the Administration of Foreign-Funded Banks (中华人民共和国外资银行管理条例) (Decree No. 478 of the State Council of the People’s Republic of China), which came into effect in December 2006 (“Foreign-Funded Banks Regulations”), there are 4 types of commercial banks that can be funded by foreign investment, namely:

  1. WFOE Bank
    • A WFOE Bank is a bank established by a foreign bank or by a foreign bank together with one or more other foreign financial institutions where:
      • “foreign financial institution” means a financial institution that is registered overseas and is licensed or approved by the financial supervisory authority in its home jurisdiction; and
      • “foreign bank” means a commercial bank that is registered overseas and is licensed or approved by the financial supervisory authority in its home jurisdiction.
  2. JV Bank
    • A JV Bank is a Sino-foreign commercial bank established by a foreign financial institution together with a PRC company or enterprise.
  3. Foreign Bank Branch
  4. Representative Office
    • A foreign investor must set up a Representative Office before it is considered eligible to set up any form of commercial bank. The scope of activities that can be carried out by a Representative Office is however extremely limited.

The different types of commercial banks described above are collectively referred to as “Foreign-Funded Banks”.

B. Applicable laws

The Law of the People’s Republic of China on Commercial Banks (中华人民共和国商业银行法), adopted in 1995 and amended in December 2003, the Foreign-Funded Banks Regulations, and the Measures on the Administration of Foreign-Funded Banks (外资银行管理条例实施细则), which came into effect in December 2006 and was last amended in 2014) are currently the main laws governing the establishment and operation of Foreign-Funded Banks.

C. The primary regulator

The CBRC is the primary approving authority for foreign investors seeking to set up a commercial bank in China. For reference, the website of the CBRC is http://www.cbrc.gov.cn.

D. General requirements for Foreign-Funded Banks

  1. It must have the ability to make profits on an ongoing basis, a good credit standing and must not have materially violated any applicable laws or regulations;
  2. The foreign shareholder of a WFOE bank or a JV Bank, and a foreign bank that plans to establish a Foreign Bank Branch or Representative Office (collectively, the “Controllers”) must have international financial experience;
  3. It must have an effective anti-money laundering system;
  4. The Controllers must have been approved by, and be effectively regulated by, the financial regulatory authority of the country or region where it is located; and
  5. Other prudent conditions as may be prescribed by the CBRC.

E. Additional conditions that apply to Controllers of Foreign-Funded Banks

WFOE JV Bank Foreign Bank Branch
The major shareholder must be a foreign financial institution which satisfies the following conditions:

  1. it must be a commercial bank;
  2. it must have had a PRC Representative Office for at least 2 years;
  3. it must have had total assets of at least US$10 billion at the end of the year immediately preceding its application to establish a WFOE; and
  4. its capital adequacy ratio must meet the requirements of the financial regulatory authority of the country/ region where it is located and of the CBRC.
The foreign shareholder must be a foreign financial institution and the majority PRC shareholder must be a financial institution. Further, the foreign shareholder must satisfy the following conditions:

  1. it must be a commercial bank;
  2. it must have established a PRC Representative Office;
  3. it must have had total assets of at least US$10 billion at the end of the year immediately preceding its application to establish a JV Bank; and
  4. its capital adequacy ratio must meet the requirements of the financial regulatory authority of the country/ region where it is located and of the CBRC.
The Foreign Bank must satisfy the following conditions:

  1. it must have had total assets of at least US$20 billion at the end of the year immediately preceding its application to establish a foreign bank branch;
  2. its capital adequacy ratio must meet the requirements of the CBRC; and
  3. it must have had a PRC Representative Office for at least 2 years if the Foreign Bank Branch is the first branch to be established in the PRC.

F. Application process

In addition to the requirement to establish a Representative Office, the application process for establishing a WFOE Bank, JV Bank or Foreign Bank Branch consists of two key stages. The first stage is preparatory establishment and the second stage is the formal establishment.

First stage: Preparatory Establishment

WFOE Bank, JV Bank and Foreign Bank Branch

To establish a Foreign-Funded Bank, the applicant must first apply for the preparation for its establishment and submit the following application documents to the CBRC in the place where the bank is proposed to be established:

  1. an application letter including the name, address, registered capital or operating capital of the proposed bank and the kinds of business it applies to engage in;
  2. a feasibility study report;
  3. a draft of the articles of association of the proposed WFOE Bank or JV Bank;
  4. a business contract signed by all shareholders of the proposed WFOE Bank or JV Bank;
  5. the articles of association of the shareholder(s) of the proposed WFOE Bank or JV Bank, or the articles of association of the foreign bank planning to set up the branch;
  6. an organisational chart and a list of the principal shareholders, overseas establishments and associated enterprises of the shareholder of the proposed WFOE Bank or JV Bank, or of the foreign bank planning to establish a branch and its group;
  7. the annual reports for the most recent 3 years of the shareholder of the proposed WFOE Bank or JV Bank, or of the foreign bank planning to establish a branch;
  8. the anti-money laundering system adopted by the shareholder of the proposed WFOE Bank or JV Bank, or of the foreign bank planning to establish a branch;
  9. a photocopy of the business licence or financial services permit issued by the financial supervisory authority of the home country or region of the shareholder of the proposed WFOE Bank, of the foreign shareholder of the proposed JV Bank, or of the foreign bank planning to establish a branch; and
  10. other documents as may be required by the CBRC.

Representative Office

A foreign bank applying to open a representative office must submit the following application documents to the CBRC in the place where the proposed representative office will be established:

  1. an application letter including the name and address of the of the proposed representative office;
  2. a feasibility study report;
  3. the applicant’s articles of association;
  4. an organisational chart and a list of the principal shareholders, overseas establishments and associated enterprises of the applicant and its group;
  5. the applicant’s annual reports for the most recent 3 years;
  6. the anti-money laundering system adopted by the applicant;
  7. photocopies of the identity certificate and academic degree certificate(s) of the proposed chief representative of the representative office, his curriculum vitae and a statement showing whether or not he has committed any malpractice;
  8. a power of attorney in favour of the proposed chief representative of the representative office;
  9. photocopies of the business licence or financial services permit issued by the financial supervisory authority of the applicant’s home country or region, and an opinion letter of such authority in respect of the application to establish a representative office; and
  10. other documents as may be required by the CBRC.

All foreign language documents, except annual reports, must be submitted with a Chinese translation.

Second Stage: Commencement of Business

WFOE Bank, JV Bank and Foreign Bank Branch

After the first stage is completed, the applicant is required to submit a business commencement application with the following documents to the CBRC in the place where the Foreign-Funded Bank is to be established:

  1. a list of the names of the principal persons-in-charge of the proposed bank and their curricula vitae;
  2. a power of attorney in favour of the proposed principal persons-in-charge of the bank;
  3. a capital verification certificate issued by a statutory capital verification institution;
  4. documents on security and precautionary measures and other business-related facilities;
  5. a guarantee issued by the foreign bank establishing a branch, confirming that it will be responsible for all taxes and other indebtedness incurred by the proposed branch; and
  6. other documents as may be prescribed by the CBRC.

G. Time frame for approval

Time frame for first stage

WFOE Bank, JV Bank and Foreign Bank Branch

The CBRC decides whether or not to approve the first stage preparation for establishment within 6 months of receiving a complete set of application documents for the establishment of a Foreign-Funded Bank, and will give written notice of its decision to the applicant. If it does not approve the establishment, it is required to provide an explanation.

In special circumstances where the CBRC is unable to complete the examination and make a decision to approve or disapprove the preparation for establishment within the timeframe, it may extend the time limit as appropriate by issuing a written notice to the applicant, although any such extension may not exceed 3 months.

Upon the grant of approval for the preparation for establishment, the applicant is required to submit an application form to the CBRC in the place where the Foreign-Funded Bank is to be established.

The applicant must complete the preparation for establishment within 6 months from the date of receiving approval for preparation, failing which it may apply for an extension of 3 months by application to the CBRC giving reasons why the extension should be granted. If it fails to complete the preparation for establishment within the extended time limit, the CBRC’s decision to approve the preparation will be automatically invalidated.

Representative Office

The CBRC decides whether or not to approve the establishment of a representative office of a foreign bank within 6 months after receiving a complete set of application documents and will give written notice of its decision to the applicant. If the CBRC does not approve the establishment, it is required to provide an explanation for its decision.

Time frame for second stage

The CBRC decides whether or not to approve an application for commencement of business within 2 months after receiving a complete set of business commencement application documents. It will then give written notice of its decision to the applicant and if business commencement is not approved, the CBRC will provide an explanation for its decision. If it approves business commencement, it will issue a financial business permit to the applicant.

Business licence

After obtaining CBRC approval, the Foreign-Funded Bank must register with the Administrative Department for Industry and Commerce (“AIC”) to obtain a business licence (namely, a Business Licence for Enterprises as Legal Persons).

H. Capital requirements

A WFOE Bank and a JV Bank must have minimum registered capital of RMB 1 billion, or an equivalent amount in freely convertible foreign currencies, which must be paid up before the business licence is issued.

If a WFOE Bank or JV Bank establishes a branch in the PRC, the branch must receive from its parent bank a non-callable allocation of at least RMB 100 million, or an equivalent amount in freely convertible foreign currencies, as its operating capital. However, the total amount of operating capital allocated to all the PRC branches of a WFOE Bank or JV Bank must not exceed 60% of the registered capital of the WFOE Bank or JV Bank (as applicable).

A branch of a foreign bank must receive from its parent bank a non-callable allocation of at least RMB 200 million, or its equivalent in freely convertible foreign currencies, as its operating capital.

The CBRC may increase the basic capital requirements and the RMB portion thereof depending on the business scope of the Foreign-Funded Bank.

I. Scope of business

Subject to the approval of the CBRC, Foreign-Funded Banks may engage in the following activities:

WFOE Bank/ JV Bank Foreign Bank Branch ( RMB business can only be provided to non-PRC citizens) Representative Office (only for non-profit business)
  1. receiving deposits from the general public;
  2. granting short-term, medium-term and long-term loans;
  3. handling acceptance and discount of negotiable instruments;
  4. buying and selling government bonds and financial bonds, buying and selling foreign currency securities other than stocks;
  5. providing letter of credit services and guarantees;
  6. handling domestic and overseas settlement;
  7. buying and selling foreign currencies and acting as an agent for the purchase and sale of foreign currencies;
  8. acting as an agent for insurance companies;
  9. inter-bank lending;
  10. bank card business;
  11. providing safety-deposit box services; and
  12. other businesses approved by the CBRC.
  1. receiving deposits from the general public;
  2. granting short-term, medium-term and long-term loans;
  3. handling acceptance and discount of negotiable instruments;
  4. buying and selling government bonds and financial bonds, buying and selling foreign currency securities other than stocks;
  5. providing letter of credit services and guarantees;
  6. handling domestic and overseas settlement;
  7. buying and selling foreign currencies and acting as an agent for the purchase and sale of foreign currencies;
  8. acting as an agent for insurance companies;
  9. inter-bank lending;
  10. providing safety-deposit box services;
  11. providing credit information services and consultancy services; and
  12. other businesses approved by the CBRC.
May engage in non-operational activities relating to the business of the foreign bank, including:

  1. liaison with its foreign headquarters and other branches outside China;
  2. market research; and
  3. consultancy services.

A branch of a foreign bank can take time deposits of RMB 1 million or more from Chinese citizens within China. A foreign bank branch can also engage in foreign exchange settlement and sale businesses with the approval of the People’s Bank of China.

J. Operational requirements

The key operational requirements which must be met by Foreign-Funded Banks are as follows:

  1. the capital adequacy ratio requirement of 8%; and
  2. the liquidity ratio (i.e. current assets/ current liabilities) must not be lower than 25%.

K. RMB business

In order to carry out RMB business, a WFOE Bank, a JV Bank or a Foreign Bank Branch must satisfy the following conditions and receive approval from the CBRC:

  1. it must have conducted business in the PRC for at least 3 years prior to applying to carry on RMB business;
  2. it must have been profitable for 2 consecutive years prior to filing the application; and
  3. other conditions as may be prescribed by the CBRC.
Skills

Posted on

2014-11-06