The Chinese government has released detailed guidelines for foreign banks operating on the Chinese mainland.

The guidelines confirm that foreign banks will be allowed to provide letters of credit (L/Cs) under the rules that come into effect on 11 December 2006.

Widespread change

Foreign banks were already allowed to issue L/Cs from branches or representative offices on the Chinese mainland.

Analysts predict, however, that the new rules, which come into force on the fifth anniversary of China's entry into the World Trade Organisation, may precipitate widespread change across the banking sector.

Retail banking

The rules essentially allow foreign banks into the retail banking sector for the first time, albeit with some restrictions. From December, they can offer yuan services to individuals if they incorporate locally.

But unlike a locally registered bank, a non-incorporated foreign bank branch may not engage in bank card business or take deposits from Chinese residents smaller than 1 million yuan.

Competition

Foreign banks expect a surge in their yuan assets when they offer yuan accounts and services to Chinese individuals, and they aim to make money from those assets by trading bonds for example.

The opening up of the retail sector is expected to attract more foreign banks to the Chinese mainland, but in retail banking they will probably face tough competition from local banks with their already extensive branch networks.

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.