China Permits Foreign Bank to Open Branch

For the first time since the Communist takeover in 1949, Chinese authorities gave permission Wednesday for a foreign bank to open a branch in China.

They approved a request by Hongkong & Shanghai Banking Corp., Hong Kong’s leading financial institution, to establish a branch in Shenzhen, the special economic zone that China has set up alongside the British territory.

Representatives of foreign banking firms, many of which have been waiting since 1979 for permission to open branches in China, were generally pleased.

Severe Restrictions

“It’s the first step towards liberalization, towards allowing foreign banks to do more business here,” the representative of an American banking firm said.

Others cautioned that the restrictions on foreign banking in China continue to be severe. So far, China has agreed to consider applications for foreign bank branches only in the four special economic zones in South China. Besides Shenzhen, they are Zhuhai, Xiamen and Shantou.

Foreign bankers also pointed out that the powers of the Hongkong & Shanghai Bank branch will be carefully limited.

“They can’t get involved in foreign currency banking,” a banking official in Peking said. “It’s still a long way from being a real bank branch.”

The branch in Shenzhen will, however, be permitted to make loans, to accept foreign-currency deposits, to issue guarantees and to handle export and import transactions.

Political Overtones

Wednesday’s announcement had some political overtones. It provided a signal that China is not closing its doors to outside investment and is continuing to support the development of its special economic zones, which were designed to attract foreign businesses and technology.

Over the past two months, Chairman Deng Xiaoping and other Chinese leaders appeared to be losing some enthusiasm for these economic zones. In June, Deng spoke of Shenzhen as merely an experiment, saying, “if it fails, we can learn from it.”

The decision to allow the bank branch in Shenzhen was approved by the People’s Bank of China, the nation’s central bank. The government-controlled New China News Agency said that “China welcomes overseas and foreign banks with good credit standing and fine relations with China” to open branches in the economic zones.

Over the past six years, about 70 foreign banks have opened representative offices in China, hoping eventually to profit from China’s modernization program. But, so far, most of the bankers have been forced to sit and wait for permission to do business here.

Until this year, the only banks allowed to have branches in China were four institutions that had opened in Shanghai before 1949. The four, including Hongkong & Shanghai Bank, were permitted to keep their branches in Shanghai, but, until this year, they had no power to accept deposits or to make loans.

In April, China announced that it would permit foreign banks to open branches in the special economic zones. Under the new regulations, a foreign bank that wants to open a branch in one of the zones must bring in operating funds of 40 million yuan, or about $14 million.

Some foreign bankers said Wednesday that the high capital requirements had discouraged them from applying.

“It’s a stiff price to pay to open a branch,” one foreign bank representative said in Peking. “We looked into it and decided it wasn’t worth it.”

Banking sources here said about 10 foreign banks are thinking of starting branches in Shenzhen. The only American institution believed to be among them is Citibank. A Citibank official, who asked not to be identified by name, confirmed that his bank is seriously considering applying to open a branch in Shenzhen.