Foreign Strategic Investment in a PRC Domestic Bank

Driven by the desire to gain a better position before China fully opens its banking sector according to its WTO commitment, and encouraged by several precedents completed in the past few years, foreign investment in the PRC banking sector by making equity investment into existing domestic Chinese banks is increasingly popular. What is the legal and regulatory framework for these kinds of transactions?

A PRC domestic bank may take the form of a limited liability company (LLC) or a company limited by shares (CLS). A CLS may be a listed company or a non-listed company. Currently no PRC banks have shares listed overseas.

Foreign investors may purchase equity interest in a PRC bank by way of transfer of existing shares or allotment of new shares. Both ways are feasible for foreign investment in an LLC bank. However, for a CLS bank, more complication arises. Transfer of non-listed shares held by domestic entities in a listed company to foreign investors was recently allowed after a seven-year ban. Although PRC law does not prohibit a listed company from making private placement to a foreign investor, in practice, there is no successful precedent in the A share market. In China, any new allotment of shares (except for bonus shares and other shares issued without consideration) is subject to approval by the China Security Regulatory Commission (CSRC). It is not likely that the CSRC would approve a private placement of A shares to foreign investors. Private placement of B shares is possible but does not apply to companies that have not yet been B share listed companies. It is much easier for a non-listed CLS bank to issue shares (including private placement) than a listed bank, but it shall be noted that issuance of new shares by a CLS bank is subject to constraints under the PRC Company Law that there shall be at least one year between two issuances.