RESTRICTEDWORLD TRADE
ORGANIZATIONS/FIN/W/20
1 October 2002
(02-5261)
Committee on Trade in Financial Services Original:  English
COMMUNICATION FROM CANADA
TRM China – Financial Services
Canada’s Questions to The People’s Republic of China
The attached communication has been received from the delegation of Canada with the
request that it be distributed to Members of the Committee on Trade in Financial Services.
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I. PREAMBLE
1. In conjunction with its accession to the WTO, China has embarked upon an ambitious
program of financial sector regulatory development, and we are aware of China’s concerted effort inthe past year to implement its WTO commitments for financial services.  New regulations for the
banking, insurance and the securities industries have increased transparency and helped to facilitate
increased foreign investment and competition.
2. The main focus of Canada’s inquiry relates to seeking clarification of the prudential reasoning
behind certain regulations.  In addition, Canada is also interested in how certain specific measures are
consistent with China’s commitments in its Schedule of Specific Commitments or the Working Party
Report on China’s Accession.  Finally, the promotion of a transparent regulatory regime is veryimportant to Canada, and some questions address this issue.
3. Canada requests that China provide a written response to these questions in advance of the
October 21, 2002 meeting of the WTO Committee on Trade in Financial Services in order to facilitate
a more fruitful exchange at that time.
Questions
A. B
ANKING
4. Article 38 of the “Detailed Implementing Rules for the Administrative Regulations on
Foreign-Invested Financial Institutions” [promulgated by the PBOC] requires that for a given branch
to be eligible to receive initial approval to provid e local currency services or to receive approval to
increase the scope of such services, this branch must have been in operation for more than three yearsand have been profitable for the two consecutive years prior to application.  Further, these
requirements will be assessed on a branch-by-branch basis.  Could China please explain why the
PBOC has adopted these requirements on a branch-by-br anch basis?  In light of the fact that these
requirements present a significant impediment to the expansion of local currency services by foreign-
invested banks, would it not be better to address any prudential concerns by simply applying theseS/FIN/W/20
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requirements to the aggregate operations of a foreign- invested bank in China rather than on a branch-
by-branch basis?
5. Article 14 of the “Detailed Implementing Rules for the Administrative Regulations on
Foreign-Invested Financial Institutions” [promulgated by the PBOC] stipulates that foreign banks
must wait one year between receiving approval for a given branch and submission to the PBOC of anapplication to open another branch.  This appears to be inconsistent with China’s commitment in its
Schedule of Specific Commitments to only retain prudential restrictions in its licensing regime for
banking. Could China please explain the details of the prudential rationale for this stipulation?
6. Article 30 of the "Administrative Regulations on Foreign-Invested Financial Institutions"
requires that the value of a foreign bank's foreig n currency deposits received within China shall not
exceed 70% of the value of its foreign currency assets  within China.  This lim its the ability of foreign
banks to lend foreign currency without borrowing fro m Chinese banks or bringing in foreign currency
from abroad.  Could China please explain the prudential rationale for this requirement?  Please
explain how this requirement is consistent with China’s Market Access commitments under
Article XVI of the GATS?
7. The PBOC has confirmed that regulations have been drafted and are being reviewed by the
State Council that would cap the amount of RMB that banks can borrow on the interbank market tofund their lending business to 40% of RMB deposits.  This could put foreign banks at an extreme
disadvantage – especially those who are not planning to establish large RMB deposit bases – because
it will artificially limit the amount of lending they can do.  Could China please explain how the
regulations are consistent with its National Treatment obligations in its Schedule of Specific
Commitments?  As well, we note that Article XV I 2(b) of the GATS states there should be no
limitation on “…the total value of service transactions or assets…” of service suppliers.  Could China
please explain how these regulations are consistent with this obligation?
8. Canada has previously informed the PBOC of its view that the minimum capital requirements
for banks are abnormally high by international st andards.  Although some foreign institutions have
decided to comply with these onerous requirements,  they may dissuade smaller banks, banks seeking
to specialize, or banks seeking to be active in smaller markets.  What is China’s prudential
concern/justification for establishing such high and inflexible capital requirements?
B. I
NSURANCE
9. In addition to banking, Canada wishes to in dicate that minimum capital requirements for
insurance companies are very high by internatio nal standards.  Could China please explain the
prudential methodology used in arriving at the capital adequacy levels?
10. China bound Mode 4 commitments to allow temporary entry for natural persons who are
senior employees of a foreign financial institution.  However, Article 15 of “Provisions of the
Insurance Company Administrative Measures” [promulgated by CIRC, March 1, 2000] states that an
insurance company establishing a branch office “shall have senior management personnel for the
branch office who meet the qualifications of their posts specified by CIRC”.  In practice, one of these
“qualifications” is that senior management personnel must be able to speak Chinese.  Thisrequirement is not listed in China’s Schedule of Specific Commitments.  Could China please explain
how this CIRC rule complies with its commitment to allow temporary entry of senior ex-patriot staff?
C. F
UND MANAGEMENT
11. Could China please provide the rationale for why Chinese mutual fund companies are not
permitted to be the lead partner in a new Sino-foreign mutual funds joint venture company?S/FIN/W/20
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II. GENERAL
12. China's licensing requirements for foreign participation in the banking, insurance, and fund
management sectors all have a complex multi-stage approval processes for establishment.  These
processes may contradict the spirit of Paragraph 308 of the Working Party Report, namely that
"China's licensing procedures and conditions would not act as trade barriers to market access andwould not be more trade restrictive than necessary."  Could China please explain how the complex,
multi-stage approval processes outlined in the "Administrative Regulations on Foreign-Invested
Financial Institutions", the "Administrative Regu lations on Foreign-Invested Insurance Companies",
and the "Administrative Regulations on Foreign Participation in the Establishment of Investment
Funds" comply with China’ s commitments in the WTO Working Party Report?
13. We note that there were no opportunities for public comment on China's new banking and
insurance regulations (e.g. "Administrative Regulations on Foreign-Invested Financial Institutions","Detailed Implementing Rules for the Administrative Regulations on Foreign-Invested Financial
Institutions" and "Administrative Regulations on Foreign-Invested Insurance Companies").  As well,
draft regulations released by the CSRC in December 2001 allowed only five days for public comment.
Finally, we note that section 2(C), paragraph 2 of the Protocol on the Accession the People's Republic
of China requires a "...reasonable period for comment to the appropriate authorities before suchmeasures are implemented...”.  Could China please explain why it was unable to allow a period for
comment in the case of the aforementioned regulations?  Have any efforts been made to make
information about draft regulations on financial services more transparent or accessible?
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