Cover, issue 413, April 6, 2009
Translated by Liu Peng
Original article: [Chinese]

In an effort to pump more loans into the rural economy and to cash-strapped small and medium-sized firms, China's Banking watchdog was looking to ease restrictions on the establishment of branch offices by local commercial banks, the Economic Observer learned.

The China Banking Regulatory Commission (CBRC) was also considering giving local banking regulators the power to approve small-and-medium-sized banks' applications to establish branches. Previously this had been the domain of central regulators.

A source close to the CBRC told the EO, such a move had already gotten the nod from the Commission's top policy-makers, but details were still being ironed out with other government organs. "If things go smoothly, the policy will likely be published out in the near future," the above source added.

The move aimed to encourage these small-and-medium-sized banks to expand their branches to rural areas, and thus increase financial support to the rural economy and smaller firms, the source close to the CBRC said.

According to the latest regulations, if state-owned banks and other commercial banks wanted to set up a new branch, their headquarter offices must submit applications to the corresponding local banking regulatory agency for preliminary review and then to the CBRC for final approval.

In addition, the CBRC was considering abolishing start-up capital requirements for new branches. "Commercial banks can expand their operation outlets as long as they meet the basic capital adequacy ratio requirements," said a source familiar with the brewing policy.

According to the present regulations, if one domestic bank wanted to set up a new branch, it must allocate working capital worth at least 100 million yuan or equivalent in freely-convertible foreign currencies. The amount could not exceed 60% of its total working capital. In addition, each commercial bank was only allowed to establish one branch per city.

An industry expert who requested anonymity held that, since state-owned banks had already expanded throughout the country, shareholding, urban commercial and foreign banks would benefit most from the policy.

Sources close to the CBRC told EO that by the end of 2008, the capital adequacy ratio for shareholding commercial banks and urban commercial banks respectively reached 10.5% and 13%, both meeting international standards for capital adequacy ratios.

Urban commercial banks like Bank of Shanghai, Bank of Ningbo, Bank of Beijing among others have enjoyed a boom over the past two years since the CBRC in April 2006 began allowing and encouraging them to head out of from their home-bases to other cities or provinces.

"Small and medium-sized banks are eager to take advantage of the huge potential for expansion. If the capital markets turn for better, they can raise the funds needed for nationwide expansion from them," the above source added.

Zhou Ming, a senior analyst of Pacific Securities, a Chinese securities investment firm, projected that part of shareholding or urban commercial banks would eventually increase their penetration of China's second-tier cities to contend with state-owned banks, while most small and medium-sized ones would dedicate themselves to rural areas.