Foreign banks face hurdle in domestic market

Foreign banks may face a higher threshold for registered capital to enter the nation's market, under draft rules proposed by the China Banking Regulatory Commission.

Wholly foreign-owned or joint-venture banks will need at least 1 billion yuan ($163.37 million) in registered paid-in capital, compared with 300 million yuan at present.

The draft raises the bar for stakeholders of foreign banks, which must have experience in international finance and have gained the financial authorities' approval in their own countries.

The stakeholders of wholly foreign-owned banks must be financial institutions, while their majority shareholders must be commercial banks.

Financial institutions with unclear share rights, low transparency or above-average asset-liability ratios won't be able to control major stakes in wholly foreign-owned or joint-venture banks.

The draft regulations also impose tighter restrictions on derivatives to improve risk controls. Derivative managers must have a clean track record of at least five years, with direct involvement in derivative trading or risk control.

Hedge-related and non-hedging products must be strictly separated.

Hu Jiye, a finance professor at the China University of Political Science and Law, saw positive signs in the tougher rules.

"China has experienced increasing degrees of opening up after it joined the World Trade Organization in 2001. It has opened its arms to all sorts of financial institutes from overseas to quench its thirst for capital," said Hu.

"However, as the country grows stronger, it needs better screening to keep out smaller and less qualified market players, leaving more room for bigger and better-regulated ones."

China attracted a host of foreign investment into its State-owned banks from 2004 to 2008 before they went public with an aim to put domestic banks on a commercial footing as part of the nation's financial reforms.

The overseas capital helped State-backed financial firms become more market-oriented. But many international investors have sold their stakes at huge profits in recent years.

Bank of America Corp, Goldman Sachs Group Inc, UBS AG and The Royal Bank of Scotland Group have realized $24 billion from selling stakes in three major Chinese banks.

The profits have led some observers to warn that State assets had been sold too cheaply, leading to calls to limit fresh foreign investment in the industry.