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Cablegate: Cbrc Assistant Chairman's and Bankers' Views On

VZCZCXYZ0027
PP RUEHWEB

DE RUEHBJA #8200/01 2410748
ZNR UUUUU ZZH ZUI RUEWMCF5310 2410743
P 290748Z AUG 06
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC 0000
RUEATRS/DEPT OF TREASURY WASHINGTON DC
INFO CHINA POSTS COLLECTIVE
RUEHGV/USMISSION GENEVA
RUCPDOC/USDOC WASHDC

UNCLAS BEIJING 018200

SIPDIS

SENSITIVE
SIPDIS

STATE FOR EAP/CM AND EB


USDOC FOR ITA/MAC/AP/MCQUEEN
TREASURY FOR OASIA/ISA CUSHMAN
AND DOHNER
STATE PASS CEA FOR BLOCKSTATE
STATE PASS FEDERAL RESERVE BOARD FOR JOHNSON/SCHINDLER; SAN
FRANCISCO FRB FOR CURRAN/LUNG; NEW YORK FRB FOR DAGES/CLARK
STATE PASS USTR
STRATFORD/WINTER/MCCARTIN/ALTBACH

E.O. 12958: N/A
TAGS: EFIN ECON EINV WTRO PGOV CH
SUBJECT: CBRC ASSISTANT CHAIRMAN'S AND BANKERS' VIEWS ON
DRAFT ADMINISTRATIVE RULES FOR FOREIGN BANKS


THIS MESSAGE IS SENSITIVE BUT UNCLASSIFIED. PLEASE HANDLE
ACCORDINGLY. NOT FOR DISTRIBUTION OUTSIDE USG CHANNELS.

SUMMARY AND COMMENT
------------------
1. (SBU) SUMMARY: ON AUGUST 25, FINATT AND ECONOFF MET CHINA
BANKING REGULATORY COMMISSION (CBRC) ASSISTANT CHAIRMAN WANG
ZHAOXING TO DISCUSS DRAFT ADMINISTRATIVE RULES ON FOREIGN
BANKS, WHICH WOULD IMPLEMENT CHINA'S WTO ACCESSION
OBLIGATIONS IN THIS SECTOR. WHILE WANG NOTED THE
REGULATIONS ARE INTENDED TO PROVIDE NATIONAL TREATMENT
BETWEEN CHINESE AND FOREIGN BANKS, HE ACKNOWLEDGED SOME OF
THE CONCERNS RAISED BY FOREIGN BANKS AND COMMITTED TO REVISE
THE REGULATIONS TO ADDRESS THEM.

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2. (SBU) SEPARATELY, FINATT SPOKE TO TWO FOREIGN BANKING
EXECUTIVES WHO HAD REVIEWED THE REGULATIONS. WHILE THEY HAD
A FEW CONCERNS, BANKING CONTACTS WERE GLAD THE REGULATIONS
HAD BEEN ISSUED EARLY AND THAT CHINESE REGULATORS ARE NOW
SEEKING COMMENTS. WHILE THE REGULATIONS GIVE FOREIGN BANKS
A STRONG INCENTIVE TO ESTABLISH LOCAL SUBSIDIARIES WITH
RELATIVELY HIGH CAPITALIZATION REQUIREMENTS IN ORDER TO
CONDUCT RMB DENOMINATED SERVICES, THIS WAS NOT VIEWED AS A
SIGNIFICANT BARRIER TO ENTRY OR EXPANSION FOR BANKS
INTENDING TO ESTABLISH LARGE BRANCH NETWORKS. END SUMMARY
3. (SBU) COMMENT: THE REGULATIONS, HOWEVER, IMPEDE MARKET
ACCESS FOR SMALLER BANKS OR THOSE SEEKING TO ESTABLISH
SMALLER BRANCH NETWORKS, AND AS SUCH, FAVOR LARGE
INCUMBENTS. IN ADDITION, REQUIRING FOREIGN BANKS TO
ESTABLISH SUBSIDIARIES AND THEN REGULATING ACTIVITIES BASED
ON CAPITALIZATION, WHILE CONSISTENT WITH NATIONAL TREATMENT
OBLIGATIONS, FAVORS DOMESTIC BANKS WHICH HAVE ALMOST ALL
THEIR REGULATORY CAPITAL IN CHINA. EVEN IF INDUSTRY
CONCERNS ARE ADDRESSED, CONTACTS EXPECT THE TIME CONSUMING
AND OPAQUE REGULATORY PROCESS TO SLOW ORGANIC EXPANSION OF
FOREIGN-CONTROLLED BANKS FOR THE FORESEEABLE FUTURE. END
SUMMARY AND COMMENT

DRAFT REGULATIONS
-----------------

4. (SBU) IN AN AUGUST 25 MEETING BETWEEN FINATT AND CBRC
ASSISTANT CHAIRMAN WANG ZHAOXING, FINATT AND ECONOFF
EXPRESSED THE UNITED STATES GOVERNMENTS INTEREST IN AND
WILLINGNESS TO REVIEW AND COMMENT ON DRAFT ADMINISTRATIVE
RULES. WANG CONFIRMED THAT THE CBRC INTENDS TO COMPLETE THE
REGULATIONS IN SEPTEMBER, WHICH WILL THEN ALLOW THE STATE
COUNCIL TO ENACT THEM BY NOVEMBER 1. WANG, WHO HAD ALSO
PRESIDED OVER A MEETING BETWEEN CBRC AND FOREIGN BANKS THIS
WEEK, SAID THERE WOULD BE AN OPPORTUNITY TO REVIEW THE
REGULATIONS.

5. (SBU) WANG ASSERTED CONSISTENCY BETWEEN THE REGULATIONS
AND CHINA'S WTO COMMITMENTS, WHICH OFFER FOREIGN BANKS THE
RIGHT TO CHOOSE THEIR LEGAL FORM OF ESTABLISHMENT. THE
DRAFT REGULATIONS, HOWEVER, GIVE BANKS A STRONG INCENTIVE TO
INCORPORATE AS SUBSIDIARIES. WANG NOTED THAT THE DRAFT
REGULATIONS HAD BEEN HEAVILY INFLUENCED BY U.S. REGULATIONS,
WHICH REQUIRE FOREIGN BANKS TO INCORPORATE TO QUALIFY FOR
FDIC INSURANCE. FINATT POINTED OUT THAT THE USG DOES NOT
REQUIRE INCORPORATION IF THE BANK DOES NOT WISH TO TAKE
INSURED DEPOSITS, AND SEEKS, AS ONE EXAMPLE, TO ESTABLISH A
CREDIT CARD BUSINESS. WANG RESPONDED THAT THE CBRC BELIEVES
CREDIT CARDS WOULD BE "CLOSELY RELATED" TO RETAIL DEPOSITS
IN CHINA.

6. (SBU) FINATT RAISED THE CONCERN THAT BANKS WHICH HAD
ALREADY BEEN APPROVED AS QUALIFIED FOREIGN INSTITUTIONAL
INVESTORS (QFII) AND QUALIFIED DOMESTIC INSTITUTIONAL
INVESTORS (QDII) MIGHT NO LONGER MEET REQUIREMENTS THAT THEY
MANAGE A CERTAIN AMOUNT OF ASSETS (USD 10 BILLION FOR QFIIS)
IF THEY INCORPORATED AS SUBSIDIARIES. WHILE WANG STATED
THAT ONE AIM OF THE REGULATIONS IS TO PROVIDE NATIONAL
TREATMENT BETWEEN FOREIGN AND DOMESTIC BANKS, HE
ACKNOWLEDGED THIS POTENTIAL PROBLEM AND SAID HIS AGENCY

WOULD BE WILLING TO REVIEW THE ISSUE.

7. (SBU) ON THE QUESTION OF WHETHER BANKS THAT SWITCH TO
SUBSIDIARIES WOULD BE REQUIRED TO "RESET THE CLOCK" IN
ESTABLISHING A THREE-YEAR FOREIGN EXCHANGE BUSINESS TRACK
RECORD WITH TWO YEARS OF PROFITABILITY IN ORDER TO CONDUCT
RMB DENOMINATED ACTIVITIES, WANG NOTED THAT THE "CBRC WILL
GIVE POSITIVE CONSIDERATION TO THE FULL CONTINUITY OF THE
BUSINESS." (COMMENT: THIS SUGGESTS THAT ALTHOUGH THE CBRC
WOULD NOT TIE ITSELF DOWN ON THE ISSUE, IT INTENDS TO GIVE
ALREADY ESTABLISHED BANKS CREDIT FOR TIME SPENT OFFERING
FOREIGN EXCHANGE RELATED SERVICES AS BRANCHES. END
COMMENT.)

8. (SBU) IN RESPONSE TO FINATT'S QUESTION ON WHETHER LIMITS
ON LENDING TO A SINGLE BORROWER APPLIED TO A SUBSIDIARY'S
CAPITAL RATHER THAN THE CONSOLIDATED CAPITAL OF A BRANCH'S
PARENT WOULD REDUCE THE AMOUNT OF LENDING BANKS COULD MAKE
TO CORPORATE CUSTOMERS, WANG OFFERED THAT THE CBRC IS
WILLING TO MAKE "SPECIAL ARRANGEMENTS" FOR LARGE COMMERCIAL
BANKS SUCH AS CITIGROUP AND HSBC. CBRC WOULD ALLOW THEM TO
CREATE "BOOKING BRANCHES," FOR BOOKING LARGE EXPOSURES
AGAINST THE CONSOLIDATED CAPITAL OF THE PARENT.

FDI LIMITATIONS
---------------

9. (SBU) REGARDING FDI LIMITS FOR DOMESTIC BANKS, WANG
REITERATED THAT THE CBRC WELCOMES FOREIGN STRATEGIC
INVESTORS. WANG ADDED THAT WHILE THE CBRC PLANS TO DEVELOP
NEW REGULATIONS FOR M&A, HE DOES NOT FORESEE SIGNIFICANT
CHANGES TO THE CURRENT LIMITATIONS ON FOREIGN OWNERSHIP OF
CHINESE BANKS. ON CITIGROUP'S BID FOR GUANGDONG DEVELOPMENT
BANK (GDB), WANG SAID THAT A FINAL DECISION WOULD OCCUR
"SOON" BECAUSE GDB DESPERATELY NEEDS FINANCIAL
RESTRUCTURING. FINATT NOTED THAT THE USG IS WATCHING THIS
DEAL WITH GREAT INTEREST AND THAT TREASURY SECRETARY PAULSON
IS ALSO COMING TO CHINA "SOON."

PRIVATE SECTOR REACTION TO DRAFT REGULATIONS
--------------------------------------------

10. (SBU) FINATT SPOKE SEPARATELY TO TWO FOREIGN BANKING
EXECUTIVES WHO HAD REVIEWED THE DRAFT REGULATIONS. THEY
SAID THAT WHILE CONCERNS REMAIN, THE CBRC'S EFFORTS IN
SEEKING INDUSTRY COMMENTS ARE PRAISEWORTHY. THEY SAID THERE
WOULD BE A STRONG INCENTIVE TO INCORPORATE; HIGH
CAPITALIZATION REQUIREMENTS WOULD IN GENERAL NOT BE A
PROBLEM FOR THOSE BANKS INTENDING TO ESTABLISH LARGE BRANCH
NETWORKS. THE CAPITALIZATION REQUIREMENTS MIGHT, HOWEVER,
KEEP OUT SMALLER- AND MEDIUM-SIZED BANKS THAT SEEK TO
ESTABLISH BOUTIQUE OPERATIONS.

11. (SBU) IN THE VIEW OF THE FOREIGN BANKING EXECUTIVES, THE
FIVE MAIN CONCERNS FOR FOREIGN BANKS ARE:

(A) LIMITS ON LENDING TO A SINGLE BORROWER WOULD BE REDUCED
AND APPLIED TO A SUBSIDIARY'S CAPITAL RATHER THE
CONSOLIDATED CAPITAL OF BRANCH PARENTS. THIS COULD REDUCE
LENDING TO LARGE CORPORATE CLIENTS.

(B) SOME FOREIGN BANKS HAD ALREADY QUALIFIED AS QFIIS AND
QDIIS. THERE WAS CONCERN THAT IF BANKS WERE REQUIRED TO
INCORPORATE, THEY WOULD NO LONGER BE ABLE TO MEET THE
REQUIREMENTS THAT THEY MANAGE A MINIMUM AMOUNT OF ASSETS
(USD 10 BILLION FOR QFIIS). (COMMENT: WHILE THE CSRC IN MID-
AUGUST REDUCED THE MINIMUM REQUIRED MANAGED ASSETS FOR
INSURANCE COMPANIES AND ASSET MANAGEMENT COMPANIES TO USD 5
BILLION, IT LEFT REQUIREMENTS UNCHANGED FOR BANKS).
(C) DRAFT REGULATIONS COULD BE INTERPRETED TO MEAN THAT ONCE
BANKS CONVERTED TO SUBSIDIARIES, THEY WOULD NEED A NEW THREE-
YEAR TRACK RECORD, WITH TWO YEARS OF PROFITABILITY BEFORE
BEING ABLE TO OFFER RMB-DENOMINATED SERVICES.

(D) A SEPARATELY CAPITALIZED SUBSIDIARY MIGHT HAVE A LOWER
CREDIT RATING, AND THUS A HIGHER COST OF FUNDS THAN ITS
PARENT.


12. (SBU) THE DRAFT REGULATIONS ALSO REQUIRE THAT A
CONTROLLING SHAREHOLDER OF A FOREIGN BANK BE A COMMERCIAL
BANK, WHICH REFLECTS THE GROWING POLITICAL SENSITIVITY TO
RISING FDI FROM EQUITY AND HEDGE FUNDS, BOTH INSIDE AND
OUTSIDE THE FINANCIAL SECTOR.
SEDNEY

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