Banking regulators may further loosen rules on foreign lenders dealing with renminbi business in response to claims by overseas players that the draft rule is too restrictive.

The China Banking Regulatory Commission (CBRC) and the Ministry of Commerce are likely to lower the minimum amount a foreign bank branch can accept for a single local renminbi deposit originally set at 1 million yuan (US$125,000) said a source from the regulatory body, adding that the two sides had yet to decide the specific amount.

The CBRC sent a draft version of the administrative rule on foreign banks to regulatory bodies and a group of foreign and domestic lenders for review in June.

The rule, which aims to regulate foreign players, will allow foreign lenders to deal with renminbi business at the end of the year in accordance with China's World Trade Organization (WTO) commitment.

But foreign banks claimed the draft rule has too high a threshold and is not conducive to overseas players expanding their renminbi business.

"The demand of foreign banks to draw a single renminbi deposit with a minimum amount of US$125,000 will hamper most local residents' ability to deposit their money in those banks," said a foreign banker who declined to be named.

A source said the banking regulator could not reach agreement on certain aspects of the rule with the Ministry of Commerce, which has a major role in ensuring China's WTO compliance.

"The two sides have been in continuous discussion and working closely in the past few days, which may finally lead to a lower threshold than the earlier proposal in order to get in line with the WTO principle for a wider open market," he said.

Foreign banks would be more willing to accept the new rule if it allowed them to collect a lower minimum amount for a single local deposit, he said.

"But this might be the only major change in the final version. The requirement written in the earlier draft saying that a foreign company cannot provide loans of more than 10 percent of its registered capital to a single client is not likely to be changed," the source said.

And the banking regulator is not ready to change the criteria demanding all banks keep overall lending no higher than 75 percent of overall deposits.

"Those criteria could still be a tough request for foreign players," an industry insider said.

Due to limited access to the renminbi retail market, foreign banks are facing a general shortage of yuan deposits, which could lead to high loan/deposit ratios.

CBRC statistics show that foreign financial institutions in China had collected 114 billion yuan (US$14.3 billion) in deposits by the end of August, while 161 billion yuan (US$20 billion) were paid out in loans during the same period.

The CBRC emphasized in its draft rule that its purpose was to encourage foreign lenders to register local corporations within China instead of setting up branches to deal with renminbi business. It said the draft rule favoured local corporations registered by foreign lenders.

"The purpose is to protect the interests of domestic depositors, and a local corporation is easier to supervise than a branch," it said.

A total of 103 foreign bank branches and seven foreign banking corporations were allowed to deal in renminbi business in 25 cities in China at the end of June. They will be allowed to expand across the country and extend their clients from enterprises to local residents at the end of 2006 under the revised draft rule.

(China Daily September 21, 2006)