China opens forex market

A flurry of overseas banks have received approval from the People’s Bank of China (PBOC) to conduct foreign currency business with Chinese corporate and individual customers – the first tangible deregulation of the financial market since China’s signing of the World Trade Agreement (WTO) last November.

The move will also allow foreign banks to offer limited foreign currency derivatives services directly to local customers for the first time, subject to central bank authorisation.

Citigroup received approval to offer foreign currency services at its Shanghai branch on March 19, making it the first wholly owned foreign bank to be approved by the PBOC.

It was closely followed by Hong Kong’s Bank of East Asia, which received approval for two branches in Guangzhou and Zhuhai, with authorisation for five additional branches expected within weeks. Earlier in March, Xiamen International Bank – a joint venture in which Asian Development Bank and Japan’s Shinsei Bank each hold 10% – became the first foreign-invested institution to win approval for a Xiamen branch.

Following the signing of the WTO agreement, foreign banks were technically allowed to offer foreign currency services to Chinese corporates and individuals immediately. In reality, non-Chinese institutions had to wait until February before new capital regulations were published by the PBOC, stipulating an increase in capital of RMB100 million ($12 million) per branch, before applying for approval.

Authorised foreign banks will now be able to take foreign currency deposits and eventually offer foreign currency loans to domestic Chinese customers. Banks can also technically offer foreign currency derivatives products, such as US dollar interest rate swaps, but require separate approval from the central bank and the State Administration of Foreign Exchange Control (SAFE) for each deal.

But there is some concern that the required level of capital is too high. “The increased capital will undoubtedly increase our country exposure and in turn, increase our risks, as well as the cost of capital,” said one Shanghai-based banker who asked not to be named. “Not every bank can afford this.”

Stanley Wong, chief executive for China at Standard Chartered in Shanghai, believes the business could prove profitable, provided banks manage to acquire sufficient market share.