Seven cities opened to foreign yuan business

China's banking regulator opened seven new cities to overseas financial institutions yesterday and made it clear state-owned commercial banks will not receive further bailouts once they have been listed on global stock exchanges.

"The government will no longer pay for the losses made by commercial banks," said the chairman of the China Banking Regulatory Commission (CBRC), Liu Minkang.

Mr Liu said foreign banks may now conduct yuan business with all customers in the cities of Harbin and Changchun in the northeast; Lanzhou, Yinchuan and Nanning, in the west; and Shantou and Ningbo in the southeast. This raises the number of cities that overseas banks can do yuan business in by more than a third, from 18 to 25.

The CBRC also lowered the registered capital requirement for foreign bank branches in China from 500 million yuan to 400 million yuan and for foreign-invested joint-stock bank branches from 300 million to 200 million.

The loosening of restrictions comes well ahead of the timetable laid out under China's World Trade Organisation (WTO) accession agreement which commits the government to open the country's banking sector to full foreign competition by December next year.

Mr Liu said the CBRC wanted to encourage foreign banks to help develop western China and revitalise industry in the northeastern rust belt.

By the end of September, bad loans in China's entire banking system had been reduced by 550 billion yuan and the industry-wide non-performing loan (NPL) ratio lowered by 4.3 percentage points to 8.6 per cent.

But analysts cautioned that the bad debt problem was not over. "Although the balance of total NPLs decreased, it was largely due to the carve-out of 705 billion yuan of bad loans in June 2005," said Fitch banking analyst Kate Lin. "If you discount this carve-out, NPLs actually increased by at least 8 per cent from the end of 2004 to the end of September."

According to government figures, the banking system is still weighed down by about 1.3 trillion yuan in bad loans.

China is partially privatising its largest state-owned banks through overseas listings in Hong Kong to introduce better corporate governance and more advanced risk management systems in the hopes of avoiding another massive build-up of bad debt.

Individual foreign institutions are limited to 20 per cent stakes and the total held by foreigners cannot exceed 25 per cent. By the end of October, 22 foreign investors had invested more than US$16.5 billion in 17 Chinese banks, Mr Liu said.