Foreign banks are increasingly aware of the potential of Hong Kong as a springboard to the Chinese mainland. As a result, many are now seeking to incorporate their business in Hong Kong to take advantage of benefits from the Closer Economic Partnership Arrangement (CEPA).

The latest is Citibank, which has just applied to the Hong Kong Monetary Authority to incorporate locally its consumer banking business, according to a report of the Hong Kong Trade Development Council on Sunday.

The bank is hopeful that incorporation will be completed by the first quarter of next year, said Kathy Cheung, head of communications in Hong Kong.

"The potential in Hong Kong is enormous due to the reform of China's banking sector," Cheung said. "To stay competitive we decided we needed to be a local company."

CEPA also makes it easier for Hong Kong-incorporated banks to apply for licenses to extend their business scope. In the past, the regulator had to be satisfied that each branch had been profitable for two of the last three years consecutively. Now, under CEPA, a bank can be assessed on a consolidated basis, instead of branch by branch.

When the mainland's WTO commitments come into effect in three years' time, foreign banks will be allowed to apply for licenses to accept yuan business from mainland consumers. If, before that, Hong Kong banks use CEPA to strengthen their presence in other parts of China, they will be at an advantage.

"Citibank already has a large established business in China, where we first had a presence in 1902," Cheung said. "In the mainland we now have six branches -- two in Beijing and one each in Tianjin, Shanghai, Guangzhou and Shenzhen."

She said the intention is not to expand this network immediately. However, Citibank believes if it is incorporated it will be better able to compete in Hong Kong in future with respect to mainland-related business.

Its decision to incorporate comes hot on the heels of that of Standard Chartered Bank. The bank has applied for authorization to establish a Hong Kong-incorporated subsidiary, Standard Chartered Bank (Hong Kong).

One of the effects of local incorporation will be that the bank's local business would be taxed at the local rate of 16.5 percent instead of the 33 percent rate prevailing in Britain, where the Standard Chartered group is headquartered.

But Peter Wong, director responsible for the bank's operations in China, denies that lower tax is the main consideration. "More important than the tax benefits is the bank's long-term vision and how we in Hong Kong can play a role as an integral part of China," he said.

"The tax implications are not the main rationale for incorporation," agrees Cheung of Citibank, which would also benefit tax wise.

Local incorporation by Citibank and Standard Chartered will put them on an equal footing with the Hong Kong and Shanghai Banking Corporation, the local unit of the London-registered HSBC group. It has been incorporated in Hong Kong since its inception here in 1865.

According to Raymond Or, general manager of HSBC, locally incorporated banks benefit from CEPA because the asset requirement for them to do business in Chinese mainland has been reduced to HK$46.7 billion (US$6 billion), enabling smaller banks to qualify. For non-Hong Kong banks the threshold is still HK$155.6 billion (US$20 billion).

(Xinhua News Agency May 3, 2004)