China opened its financial industry to foreigners in 1979, bringing in advanced managerial skills, marketing techniques, new financial products and competition. More importantly, it created a new inflow of capital. China has embarked on a carefully planned, gradual method of internationalization of its financial markets. The sequence for this process has been to open parts of the banking sector; second, to open parts of the insurance industry; and the, the securities market. The current Chinese regulations allow foreign financial institutions to establish representative offices, branches and wholly-owned or joint-venture subsidiaries in banking and insurance.

China is taking a positive but cautious approach to liberalizing its financial system. The success depends not only on the performance of the financial system itself, but also on other reforms in fiscal policy, taxation, investment and pricing. The challenges that China faces in the current reform are more complex than one could normally anticipate, and thus require much more synchronization.

Foreign establishment

In the past decade, it is witnessed a continued expansion of foreign financial institutions in China, as the State Council authorized the opening of 11 more cities to foreign banks to set up offices. These cities, mostly interior provincial capitals and economic centers, include Beijing , Shenyang , Shijiazhuang , Xi'an , Hefei , Hangzhou , Suzhou , Wuhan , Chongqing , Chengdu and Kunming , increasing the total number of cities to 24.

Growing profitability of foreign banks

By the end of last year, 127 foreign bank branches and subsidiaries had total assets of US$ 19.1 billion, a 62% increase over 1994. Total loans outstanding reached US$ 12.7 billion, an increase of 68% compared to 1994. The total deposits outstanding amounted to US$ 3.1 billion with an increase of 26% over 1994.

The statistics reveal that foreign capital has been brought in basically to support domestic economic development. For example, over 90% of the loans were made to enterprises in China . Foreign banks in China are generally profitable. Most make a profit or break even in two years of operation.

Insurance and investment companies are making inroads in China

Two foreign insurance companies in Shanghai , the American International Group and the Tokyo Marine and Fire Insurance Company of Japan made remarkable progress in 1995. By the end of the year, the total assets of the two increased to RMB 500 million (US$ 60 million). Foreign insurers' distribution techniques and new products are a definite plus to the Chinese market. Among 49 products they introduced into China , 15 were not offered by domestic Chinese companies.

Progress has been seen in investment banking as well. In August 1995, China International Capital Corp., the country's first joint-venture investment bank owned by Morgan Stanley, the People's Construction Bank of China and a few other institutions formally inaugurated its operation, ushering in a new wave of foreign entries into China 's financial industry.

Regulation and supervision

To establish facilities in China , foreign financial institutions should first consult The Regulations Governing Foreign Financial Institutions in the People's Republic of China , promulgated by the State Council in 1994. This document provides a comprehensive legal framework for licensing procedures and supervisory routines for foreign financial institutions. Other regulations applicable include:

• The Procedures of the People's Bank of China Regulating the Establishment of Representative Offices in China by Foreign Financial Institutions,
• The Provisional Procedures Governing Foreign Insurance Companies in Shanghai , and
• The Provisional Procedures Governing Chinese and Foreign Joint venture Investment Banking Institutions.

All of these regulations define prerequisite qualifications, application procedures, business scope and supervisory routines for the establishment of relevant institutions.

China has set up specific criteria for foreign financial institutions applying for business operations in China .

For instance, to start a wholly foreign-owned or a joint venture bank, an applicant is subject to the following conditions:

• The applicant must be a financial institution,
• The applicant must maintain a representative office in China for two years or longer,
• The total assets of the applicant at the end of the year prior to application must not be less than US$10 billion, and
• The applicant's home country must have a sound system for financial regulation and supervision.

To establish a foreign bank branch, the minimum assets required is US$ 20 billion in addition to other conditions.

As financial legislation develops in China , the People's Bank of China (PBOC) will further strengthen its supervisory role of foreign financial institutions. In its supervision of foreign financial institutions, the PBOC has gradually adopted on-site examination and off-site surveillance, routine practices by financial regulators in other countries. Taking into consideration the guidance and principles proposed by the Basle Committee on Banking Regulation and Supervision, the PBOC has further enhanced its cooperation with the exchange of information regarding the process of cross-border banking supervision.

Both the opening to foreign financial institutions and the reforming of the domestic financial system should be a gradual process. Further opening of the financial sector has to be synchronized with overall financial reform. The plan is outlined below:

• Issuing more licenses – Since the state council authorized 11 new cities to accept foreign financial institutions in 1995, the PBOC has been issuing more business licenses to foreign banks, particularly in the aforementioned cities.
• Enlarging the business scope of foreign banks, including granting to these banks permission to gradually engage in Renminbi business on a trial basis.
• Continuing the insurance experiment – Following the trial opening of the Shanghai insurance market, the PBOC will consider, pending approval by the State Council, granting more licenses to foreign insurance companies in 1996.