New Legislation on Foreign-funded Financial Institutions in China

On December 12 2001 the State Council promulgated the PRC Regulations Concerning the Administration of Foreign-funded Financial Institutions (the New Regulations), which have replaced prior legislation enacted by the State Council on February 25 1994. The aim is to update legislation on financial services to help China meet its WTO obligations. 

The New Regulations govern the following financial institutions established and engaging in financial services businesses in China in accordance with the relevant laws and regulations of the PRC: i) foreign-funded banks with headquarters in China; ii) branches of foreign banks in China; iii) equity joint venture banks (EJV banks) established by foreign financial institutions and Chinese companies or enterprises; iv) foreign-funded financial companies with headquarters in China; and v) equity joint venture financial firms (EJV financial firms) established jointly by foreign and Chinese financial companies or enterprises.

The Investors

In line with the country's WTO commitments, the New Regulations loosen the restrictions on the Chinese investor in EJV banks and EJV financial firms, while no substantial changes are available to the foreign investors. According to Article 2 of the New Regulations, Chinese companies and enterprises, including non-financial institutions, are allowed to invest in EJV banks and EJV financial firms. Although the New Regulations have not stated the requirements of the Chinese investors in these firms, it appears that the forthcoming implementing rules of the New Regulations will specify the details.

In an effort to boost supervision over financial institutions, the New Regulations specify the documents that foreign investors shall submit for approval. When applying to set up foreign-funded financial institutions, in addition to other conditions set out in the 1994 regulations, foreign investors shall be under the effective supervision of the competent authorities where the foreign investor is located and shall have obtained approval of such authorities for setting up a financial institution in China. Further, the foreign investors shall meet the prudential requirements set by the People's Bank of China (PBOC), China's central bank, which may be set out in the forthcoming implementing rules.