[ By Andy Scott, Managing Editor, China Briefing ]

China?s booming economy is drawing foreign investors in record numbers. However, for some, that has meant having to deal with volumes of ever-changing regulations, high initial capital expenditures and shifting political alliances. Some of China?s most highly regulated industries have come to represent the last, great Holy Grail for foreign investment in the mainland. Whether it is banking or energy, these sectors continue to remain elusively out of reach for all but the biggest and most patient of the large multinationals. In this article, we focus on three very different industry sectors to examine how the regulations affect being able to do business in China.

Banking

China?s banking industry has seen major changes over the past decade. Merely five years ago, China?s banks were all large, entirely state-owned and cobbled by massive debt. When the government wiped away much of that dept, many of the banks on the mainland transformed themselves into the darlings of Hong Kong, raising billions in initial public offerings.

In 2007, China?s banking sector rose to RMB52.6 trillion, up from RMB43.9 trillion in 2006, according to statistics released by the China Banking Regulatory Commission (CBRC). China?s five big state-owed banks ? Bank of China, China Construction Bank, the Industrial and Commercial Bank of China, the Agricultural Bank of China and the Bank of Communications ? accounted for 53.3 percent of the total assets. Eyeing the potential market on the mainland, foreign banks are now also increasingly moving in to set-up their own, locally-incorporated branches, giving them the ability to conduct both foreign currency and local RMB business.

By the end of 2007, more than 20 foreign banks had received permission to operate on the Chinese mainland with corporate status. The banks, including Citibank, Deutsche Bank, Standard Chartered Bank and Mizuho Corporate Bank, can conduct comprehensive business in foreign currencies and the RMB, and since late 2006, RMB business for Chinese residents. In November 2006, the CRBC promulgated the Regulations of the People?s Republic of China on the Administration of Foreign-funded Banks, paving the way for foreign banks to enter the Chinese market, but putting in place restrictions on business scope and capital requirements that foreign funded banks must first fulfill.

Currently, branches of foreign banks are allowed to engage in local currency retail business with local residents if the branches incorporate locally, however, in order to do so, they must acquire a local currency business license. To do this, foreign bank branches must individually apply to the CBRC for the license.

Foreign banks must also meet significant capital requirements before they are allowed to operate on the mainland. According to the regulations, the minimum operating fund requirements for foreign bank branches is RMB200 million to conduct foreign currency business and RMB300 if they want to conduct both RMB and foreign currency businesses. For locally incorporated banks of foreign banks, the register capital required is the same as domestic Chinese banks, RMB1 billion, while the minimum operating fund requirement is RMB100 million.

To establish a foreign-funded bank, an applicant must first apply for preparatory establishment and submit the following documents to the banking regulatory institution in the location where the foreign-funded bank is to establish:

• application (name, address, registered capital or operating capital and the categories of the institution to be established)
• feasibility study report
• draft of the articles of association of the solely foreign-funded bank or Sino-foreign equity joint bank to be established
• business operation contract by all shareholders to a solely foreign-funded bank or Sino-foreign equity joint bank to be established
• articles of association of the shareholders to a solely foreign-funded bank or Sino-foreign equity JV, or the articles of association of the foreign bank of a branch to be established
• diagram of the shareholder structure
• the three most recent annual statements of the shareholders that plan to establish a solely foreign-funded bank or Sino-foreign equity joint bank or of the foreign bank that plans to establish branches
• anti-money laundering system of the shareholders or foreign bank
• photocopy of the business license or financial business licensing document which is issued by the financial regulatory authority of the county or region of the foreign shareholders or the foreign bank
• other materials as required by the banking regulatory institution of the State Council

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