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China Law & Policy (September 2018) - Removal of Foreign Investment Restrictions on Chinese Banks9월 7, 2018
This article* discusses the removal of restrictions on foreign acquisition of domestic Chinese banks (as distinct from banks established in China using foreign funds, “Domestic Banks”). Recently, China’s Ministry of Commerce (MOFCOM) and National Development and Reform Commission (NDRC) published the Special Administrative Measures on Access to Foreign Investment (Negative List) (2018 Version) (the “2018 Negative List”), which purports to further open up certain sectors to foreign investment. The 2018 Negative List became effective as of July 28, 2018, and replaces an earlier version of the catalogue. One of the most crucial changes in the 2018 Negative List is the removal of restrictions on foreign investment in the banking industry. This opening was further codified by recent changes in regulations published by the China Banking and Insurance Regulatory Commission (the “CBIRC”).
The first part of this article introduces changes governing foreign investment in Domestic Banks. The second and third part of this article outline the current foreign ownership requirements and the procedural requirements for foreign acquisition of Domestic Banks. The fourth part suggests the likely impact on foreign investors. The final part discusses some continuing questions following the recent opening.
I. Removal of Restrictions on Foreign Shareholding
China has long restricted foreign investment in Domestic Banks. Under the Catalogue for Guiding Foreign Investment in Industries (2017 Revision) (the “2017 Catalogue”), the banking industry was classified as restricted to foreign investment, and similar treatment has applied in past catalogues over the last 23 years. Prior to the 2018 Negative List, a foreign financial institution could set up a wholly foreign-owned bank in China (an “FIE Bank”), but foreign investors were specifically barred from acquiring a controlling interest in Domestic Banks. Further, an individual foreign investor could not acquire more than 20% of an existing Domestic Bank, and in the case of a Domestic Bank invested by more than one foreign investor, the aggregate foreign ownership could not exceed 25%.
The removal of the banking industry from the 2018 Negative List effectively moved banking from a “restricted” category of foreign investment to a “permitted” category of foreign investment, indicating that limitations on the stake a foreign investor could acquire in Domestic Banks had been abolished.
Relevant banking regulations have recently been revised in line with the 2018 Negative List. On August 17, 2018, the CBIRC published the Decision on Abolishing and Revising Some Rules in order to revise the Implementation Measures of the China Banking and Insurance Regulatory Commission for the Administrative Licensing Items Concerning Chinese-Funded Commercial Banks (the “Decision”), removing CBIRC restrictions on the share ratio that foreign investors could acquire in Domestic Banks.
II. Current Requirements for Foreign Ownership
Despite the removal of share ratio restrictions on foreign investment in commercial banks, the market has not been completely opened. Under current rules, a qualified foreign investor must meet at least the following requirements:
- The investor must have at least US$10 billion in assets as of the end of the latest year;
- It must have been rated as an entity with good long-term credit by an international rating institution recognized by the CBIRC in the past two years;
- It must have been profitable for the past two consecutive fiscal years;
- For foreign investors that are a commercial bank, the capital adequacy ratio must at least equal the average for its place of registration (注册地), and in any event must not be less than 10.5%. For foreign investors that are non-bank financial institutions, the capital adequacy ratio must be no lower than 10% of the total amount of risk-weighted assets;
- It has adequate and effective internal controls;
- Its place of registration (注册地) has a sound regime for the supervision and administration of financial institutions; and
- The economy of its country/region of residence (所在国) is in good condition.
These requirements will continue to apply after the revisions to the 2018 Negative List and the CBIRC Decision.
In addition to the above prudential requirements, the Chinese government encourages foreign investors to hold their investments in Domestic Banks on a long-term basis. However, there is no clear timeframe given for the holding period contemplated by the government.
III. Procedural Requirements
Foreign acquisition of an interest in a Domestic Bank is subject to obtaining the prior approval of CBIRC (unless the share percentage involved is less than 5%), followed by notice filing with NDRC and MOFCOM, and registration with the State Administration of Market Regulation (SAMR).
- CBIRC Approval/Reporting
A foreign investment in a Domestic Bank must obtain prior CBIRC approval if the share percentage involved is more than 5%. If the share percentage is more than 1%, but less than 5%, then the transaction must be reported to CBIRC within 10 days after the transaction.
- NDRC Filing
While regulations require filing with the NDRC in connection with a foreign investor acquiring an interest in a Domestic Bank, NDRC procedures are not clear on the filing procedure, and the different localities within China have significant discretion as to how they will interpret the filing requirements. Based on discussion with officers in the Shanghai office of the NDRC, they seem to require notice filing with the NDRC before closing of the transaction.
- MOFCOM Filing
Consistent with other industries that are treated as “permitted” categories of foreign investment, foreign investment in a Domestic Bank does not require MOFCOM approval. However, together with registration of the transaction with SAMR, a notice filing must be made with MOFCOM.
- SAMR Registration
Following the closing of the transaction, the target Domestic Bank should register all of its changes with SAMR, including but not limited to changes in shareholding, changes of directors and officers, and amendment of articles of associations.
IV. Opportunities for Foreign Investment
Notwithstanding the theoretical possibilities suggested by the recent revisions, it remains unlikely that a foreign acquisition of a control stake in a large state-owned bank would be permitted in the current environment. However, it might point the way for foreign investors to acquire larger strategic interests in the state-owned banks. Further, there are increasing numbers of small, privately owned banks in China. Therefore, the reforms may provide opportunities for a foreign investor to acquire one of the increasing number of regional banks.
In terms of benefits to foreign investors, the current banking regime in China imposes fewer restrictions on the business of Domestic Banks (as distinct from FIE Banks). For example, Domestic Banks are able to engage in RMB business without acquiring a separate license, while FIE Banks must obtain a specific license to engage in RMB business.
In addition, Domestic Banks have business licenses that would permit, among other things: (i) the issuance of debt and capital replenishment instruments; (ii) derivatives business; and (iii) credit card business. The path to getting some of these licenses after setting up a new bank (especially an FIE Bank) is very long and can take years.
- For RMB business, FIE Banks must have operated in China for more than one (1) year before applying for such license. It typically takes another three (3) months for the CBIRC to decide whether to grant such approval.
- A license for issuance of debt and capital replenishment instruments requires at least 3 years of financial statements.
- For a license to conduct credit card business, a prerequisite is obtaining a permit for engaging in the business of purchase and sale of foreign exchange, which is further subject to approval of the People’s Bank of China and SAFE.
V. Continuing Questions
Notwithstanding the promise of this opening, there are continuing questions that would have to be asked by a would-be foreign investor in China’s banking sector.
- There has been some concern among regulators and investors as to whether China’s privately owned banks have been following best practice. Due diligence would be particularly important in any foreign acquisition of a Domestic Bank.
- Cooperation with continuing Chinese shareholders may pose challenges. Several foreign banks have reportedly sold out their previous positions in Domestic Banks. For instance, Deutsche Bank sold 19.9% of its shares in Huaxia Bank in 2016, and Goldman Sachs sold all of its shares in the Industrial and Commercial Bank of China in 2013. Though these investments appear to have been very profitable, it is unclear that foreign investors achieved their goals of increasing their participation in the Chinese banking market.
- It further remains to be seen whether the business restrictions on foreign-funded banks will be imposed on a foreign-controlled “domestic” bank after an acquisition or whether there may be roadblocks imposed on desirable permits continuing for a Chinese bank after acquisition by a foreign investor.
These do not seem like insurmountable obstacles, and in some cases, may just need time for further resolution.
* O’Melveny recognizes legal consultant Jenny Wang for her valuable contribution in researching and drafting this article.
 The Special Administrative Measures on Access to Foreign Investment (Negative List) (2018 Version) (《外商投资准入特别管理措施(负面清单)(2018年版)》),promulgated Jun. 28, 2018, by the Ministry of Commerce and National Development and Reform Commission.
 Catalogue for Guiding Foreign Investment in Industries (2017 Revision) (《外商投资产业指导目录(2017年修订)》), promulgated Jun. 28, 2017, by the Ministry of Commerce and National Development and Reform Commission.
 The first catalogue was issued in May 2015, where the banking industry was among the prohibited list.
 Article 2.1, Decision of the China Banking and Insurance Regulatory Commission on Abolishing and Revising Some Rules (《中国银保监会关于废止和修改部分规章的决定》)
Article 11, Implementation Measures of the China Banking and Insurance Regulatory Commission for the Administrative Licensing Items concerning Chinese-Funded Commercial Banks (2018 Revision) (《中国银保监会中资商业银行行政许可事项实施办法(2018修订)》)
 Article 10, Implementation Measures of the China Banking and Insurance Regulatory Commission for the Administrative Licensing Items concerning Chinese-Funded Commercial Banks (2018 Revision) (《中国银保监会中资商业银行行政许可事项实施办法(2018修订)》)
 There is no gloss given on what constitutes a jurisdiction with a “sound regime”, but ostensibly an OECD country might be viewed as existing on one end of the spectrum, and less prosperous countries might be viewed as existing on the other end of the spectrum.
 When China initially adopted the negative list approach to foreign investment, MOFCOM registration was typically made after registration with the State Administration of Industry and Commerce. However, to streamline the foreign investment process, the Chinese government has urged local authorities to combine MOFCOM filing with SAMR registration. (SAMR is the successor of the State Administration of Industry and Commerce).
 Implementation Measures of the China Banking Regulatory Commission for the Administrative Licensing Items concerning Foreign-Funded Banks (2018 Revision) (中国银监会外资银行行政许可事项实施办法(2018修订))
 Administrative Measures for the Foreign Exchange Purchase and Sales Business Provided by Banks (2014) (《银行办理结售汇业务管理办法》)
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