Regulation and supervision for foreign banks in China

Part 2：Why China need regulate and supervise foreign banks

On December 2006, Chinese government published The Regulation on Administration of Foreign Banks, which is the first regulations specify rules for foreign banks in China, also it indicated, from Jan 2007 China would carry out comprehensive national treatment for all foreign banks. Since 2007, foreign Banks no longer restricted by industries and region in China.

According to the report from China Banking Regulatory Commission about foreign banks we can know, by the end of September 2011, there were 39 foreign legal person banks( included 247 branches and affiliates) and 93 foreign bank branches, 207 representative offices set up in China. Compared with the data before China entred into WTO, there was a huge increasing(increased 175 foreign bank branch and increased 374 foreign bank representative offices after entering WTO ). At the end of 2011, the total capital of foreign banks in China is 2.06 thousand billion RMB and the capital of top five foreign banks( HSBC, Citibank, Bank of East Asia, Standard Chartered Bank, Hang Seng Bank) all excess one hundred billion RMB.  (Data Source: http://www.cbrc.gov.cn/chinese/home/docView/F66A0967E8A74157AD58642D5A1BEF76.html)

These figures tell us, foreign banks play a more and more important role in the financial market of China. On the one hand, foreign banks can stimulate and perfect the Chinese competitive financial market, and also enhance the management quality and competitiveness of the domestic banks. On the other hand, domestic banks would lose some business and market during competition, also foreign banks would increase the instability of financial market of China. therefore, if Chinese government did not use an appropriate way to regulate and supervise foreign banks, it might had some negative impact on the economy and finance, even might result in finance crises.    

Under the principle of national treatment for foreign banks, the regulation for foreign banks in China should not be a specially issue. However, China is a developing country, the previous financial system in China are closed market type, now the financial system are changing into a open market type and this system is still incomplete during these period. Therefore, foreign banks would have significant difference with domestic banks in many areas. For instance, foreign banks have stronger financial innovation ability, have rich experience on off balance sheet business and widely use various financial derivatives in business. These difference make it difficult to use the same regulations for foreign banks and domestic banks. Therefore, within this period, Chinese government set up the appropriate regulations for foreign banks would improve the effectiveness of regulation and reduce the financial risk that might caused by foreign banks.