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In today's Wall Street Journal print and on-line edition there are two articles dealing with China's banking sector: China Tells Foreign Banks Terms for Yuan Business and HSBC to Expand Retail Banking In Chinese Market.

First, as part of China's accession to the WTO in 2001, it pledged to open its banking sector to foreign banks to include the handling of local-currency deposits from individuals by the end of this year. Many foreign banks are concerned Beijing might impose difficult and costly requirements as part of its opening up.

Some light was shed on expectations as a notice of draft rules from the Banking Regulatory Commission was floated to foreign banks saying they must incorporate their local operations in China as a China-registered company capitalized with at least 1 billion yuan ($125m), or effectively the same requirements for domestic banks. This could be problematic for foreign banks since their China operations are much smaller than domestic counterparts.

London-based HSBC Holdings PLC has the largest foreign bank presence in China and said it is preparing for the opening up of China's banking sector to full foreign competition by expanding its retail banking operations. HSBC subsidiary Hang Seng Bank of Hong Kong said the expansion will result in over 30 outlets by the end of the year, meaning at least 6 more new branches or sub-branches. HSBC plans to hire 2,000 new staff by the end of 2007. Its focus will be on major areas of economic activity such as: Shenzhen, Guangzhou, Shanghai and Beijing. Hang Seng Bank's CEO told reporters his bank has received the draft rule notice (see above paragraph) and is "reviewing the document" but he didn't comment on his bank applying for local incorporation.

Comment: The capital and incorporation requirements outlined in the notice are a negative development for foreign banks bringing the possibility of higher-than-expected costs and legal and tax complications. China's Banking Regulatory Commission attempted to justify its requirements in the English translation of its notice which said:

"In comparison with the current client scope and business scope that have been launched by foreign-funded banks, due to the yuan retail business's vital importance to national interest and people's livelihood, the requirements for business procedures and risk control differ."

The CEO of HSBC's (HBC) Hang Seng Bank responded neutrally saying his bank is reviewing the document but he also outlined the above mentioned expansion plans and said his bank plans to strengthen cooperation with its local partners to better service mainland Chinese residents by offering comprehensive financial services. HSBC's expansion plans and larger presence in China will keep rival Citigroup (NYSE:C) playing catch-up. In fact, in recent weeks HSBC reported strong first-half earnings and said it surpassed Citigroup as the world's largest bank by assets.

Source: Developments in China's Banking Sector