Saturday, June 24, 2006

Hope springs eternal. This is definitely the case for foreign banks wanting to get a slice of the China-market. US bankers always come home optimistic after they talk with CBRC or PBOC officials because these officials always claim that momentous change is just around the corner. In the case of increasing the cap on foreign ownership of Chinese banks (from current 25%--20% per investor), the rumor has been circulating for years, prompted by "remarks" by CBRC officials. I have no doubt that many in the CBRC support raising the cap, which makes their job easier, but they do not make these decisions. The State Council does. I just don't see the right political environment in which a major policy like raising the cap can be implemented in the near future, at least not until after the 17th Party Congress.

Dow Jones
China May Raise Caps on Banks
June 23, 2006; Page C4

BEIJING -- Chinese officials have indicated they are considering raising limits on foreign investment in the country's banks, though restrictions on smaller banks will likely be relaxed more rapidly than on the five biggest state-owned institutions, a U.S. industry executive said.

Donald Evans, a former U.S. commerce secretary who now heads the Financial Services Forum, an industry group, met with Chinese officials this week to urge them to allow foreign banks to take a more significant level of control in domestic institutions. He said he believes China is "moving in that direction."

"It's under discussion. But my impression is that the caps for equity ownership by foreign investors will move up at a quicker pace for the provincial banks than for the big five state-owned banks," Mr. Evans told reporters on Thursday.

A single foreign investor is now permitted to own no more than 20% in a single bank, while the total foreign investment in each domestic bank may not exceed 25%.

Earlier this month, Liu Mingkang, chairman of the China Banking Regulatory Commission, said the commission is studying whether to ease the limits and will publish its decision by December. On his visit to Beijing, Mr. Evans met with Mr. Liu as well as with officials from the central bank, finance ministry and other financial regulators.

Mr. Evans said no timetables for those changes, or specific thresholds of investment, were discussed, but he noted that he does expect some new developments in coming months. Mr. Evans emphasized that his assessment of likely policy changes is his own, though it is based on his discussions with Chinese officials.

A test case of regulators' willingness to bend the current rules has been the sale of an interest in Guangdong Development Bank, for which rival consortia, one led by Citigroup Inc. and one by Société Générale SA, are bidding. Both of the original proposals for taking majority control of the bank would have breached current limits. They have since been modified after languishing for several months.

Foreign banks have already poured billions of dollars into investments in other Chinese institutions, despite being restricted to minority stakes. "The CEOs of the largest financial institutions in the world...are saying that China is where the best opportunity is," Mr. Evans said. He declined to comment on the Guangdong Development Bank case.

Write to Andrew Batson at andrew.batson@dowjones.com1

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