RESTRICTEDWORLD TRADE
ORGANIZATIONS/FIN/W/33
12 November 2003
(03-6066)
Committee on Trade in Financial Services Original:  English
COMMUNICATION FROM CANADA
Transitional Review Mechanism in connection with Paragraph 18 of
the Protocol on the Accession of 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. Canada welcomes the significant progress made by China in striving to implement its WTO
commitments for financial services.  Approvals for new entrants to the banking, insurance and the
securities industries have increased competition, while geographic restrictions have so far been lifted
within the timeframes committed to by China.  In addition, while licensing procedures remainburdensome, Canada understands that published timelines for approval are being respected for the
most part.  Finally, the release of new rules and regulations governing financial services has enhanced
transparency for firms operating in China.
2. Building on Canada’s submission for the TRM pr ocess in 2002 (S/FIN/W/20), the main focus
of this inquiry is to seek clarification of the prudential reasoning behind certain regulations.  In
addition, Canada is interested in how certain specific measures are regarded to be consistent with
China’s commitments in its Schedule of Specific Commitments and/or the Working Party Report onChina’s Accession.  The promotion of a transparent regulatory regime is very important to Canada,
and a number of questions/comments address this issue accordingly.  Further to China’s intervention
during the 2002 TRM exercise, Canada is also requesting further clarification on some issues
regarding banking services and licensing procedures for financial services, as noted below.
3. In accordance with paragraph 18 of China’s accession protocol, and in order to contribute to
an informed discussion, Canada requests that China provide written responses and relevant
information concerning these questions and comments before the next meeting of the Committee on
Trade in Financial Services.
II. QUESTIONS AND COMMENTS
A. I
NSURANCE
4. To ensure that insurance firms can form cl ear expectations regarding their rights and
obligations when operating in China, Canada would like to encourage CIRC to communicate with
insurance firms in writing as much as possible, es pecially regarding interpretation of relevant rules
and regulations.S/FIN/W/33
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5. Canada understands that domestic insurers can apply to be licensed at the city level or the
provincial level, and a provincial license allows a firm  to offer services to any city or area within the
province.  Can China please confirm this understanding?  As well, while China’s GATS Schedule of
Specific Commitments states that foreign-invested insurance firms will face restrictions on geographic
expansion for the first three years after accession, can China please confirm that after this three-yearperiod (i.e. as of December 2004), foreign-invested insurance firms will also be allowed to apply for
provincial licenses (consistent with China’s Nati onal Treatment commitments)?  If foreign-invested
firms will not be allowed to apply for provincial licenses, can China please outline the process by
which foreign-invested firms will be permitted to expand geographically?
6. Can China please outline the approval requirements and procedures for new life insurance
products and provide information on any differences that may exist between actual approval times for
foreign-invested firms and domestic firms?  Is the approval procedure the same for foreign and localcompanies, including for industry consultations and/or hearings regarding new product filings?  If not,
can China please explain how this is consistent with its National Treatment obligations in its Schedule
of Specific Commitments?  In addition, can China please confirm that prior approval by CIRC is
required for each new life insurance product, and that the product must be re-approved for sale in each
separate city that a foreign-invested life insuranc e firm operates in?  Is this also the case for both
foreign and domestic firms?  If CIRC requires re-approval for each city in which a life-insurance
product is to be sold, can China please explain the prudential rationale behind requiring multiple
approvals for the same product?
7. According to a notice issued by CIRC on 27 October 1999, “Circular on Re-Transmission of
‘Reply of the People’s Bank of China to Permit Experimented Agreement Deposits of InsuranceCompanies with Commercial Banks’” (No. 201), domestic firms are allowed to freely place
contractual deposits (that can include special interest rates) with local banks.  However, the 1999
notice also explicitly excludes foreign-invested insurance firms from this permission, and Canada’s
understanding is that foreign-invested firms must at present obtain special written permission from the
regulator before they can negotiate contractual deposits with local banks.  Can China please confirmwhether this discriminatory rule is still in place, and if so, whether it is administered at present by the
PBOC or the CBRC?  As well, should this rule still exist, can China please explain how it plans to
reform it to ensure National Treatment for foreign-invested insurance firms?
8. Canada notes that minimum capital requirement s for insurance companies remain very high
by international standards, and requests that China continue to review its capital requirements to
ensure efficiency and an entry regime that is not overly burdensome for foreign insurance firms.
9. Can China please provide an overview of the recent changes to reserving requirements for life
insurance products?  As well, can China please outline the policy basis supporting the introduction of
stricter reserving requirements at this time?  Further, is it the case that domestic firms, including those
that must honour high guaranteed-rate insurance policies sold in the 1990s (and which threaten the
soundness of their capital bases when current interest rates are very low), are in some cases being
given leeway with respect to complying with the new reserve requirements for in-force policies?Canada is concerned that foreign-invested life insurance firms (which do not have these expensive
guaranteed-rate policies on their books) now face a higher cost of doing business and reduced
profitability because the new reserve requirements  are effective immediately for their in-force and
new policies.  Is China considering any further revi sions to its life insurance reserving regulations to
promote the continued stability of domestic life insurers while not adversely affecting those foreign-invested firms that have entered the market more recently and have maintained healthy balance
sheets?  Has China ensured that it is complying w ith its National Treatment commitments with respect
to the design and implementation of these new reserve requirements?S/FIN/W/33
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10. 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 “qua lifications” is that senior management personnel
must be able to speak Chinese.  Can China please outline the criteria used to assess this qualification?As well, what managerial positions are typically bound by this qualification?
B. B
ANKING
11. During the 2002 TRM exercise China commented in general terms on registered capital
requirements for branches of foreign-invested banks.  However, it did not explain the prudential
rationale behind assessing these requirements on a branch-by-branch basis, including the 8% capital
adequacy requirement for each individual branch.  Canada’s concern relates to capital adequacy ratios
for individual branches and Article 38 of the “D etailed Implementing Rules for the Administrative
Regulations on Foreign-Invested Financial Institutions” [promulgated by the PBOC], which requires
that for a given branch to be eligible to receive init ial approval to provide 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 years and have been profitable for the two consecutive years prior to application.
Canada reiterates that these requirements, especially when imposed at the individual branch level,present a significant impediment to the expansion of local currency services by foreign-invested
banks.  Would China please explain why it disagrees with the view that applying prudential
requirements to the aggregate Chinese operations of foreign-invested banks may be more efficient
than addressing prudential concerns on a branch-by-branch basis?
12. Canada would once again like to take this opportunity to raise its concerns regarding the
CBRC’s unusually high minimum capital requirements for banks.  While Canada recognizes and
appreciates the differentiation that is incorporated  into the capital rules (i.e. different levels of
required capital depending on the scope  of business), it remains the case that the lack of flexibility in
the capital requirement guidelines regarding the size of banking operations can adversely affect
smaller banks, banks seeking to specialize, or banks seeking to be active in smaller markets.  As aresult, these requirements can have a significant negative impact on competition.  Is the CBRC
planning to introduce more flexibility into its capital rules to help smaller firms compete on a more
even footing?  If so, over what timeframe will these changes be implemented?
13. Article 14 of the “Detailed Implementing Rules for the Administrative Regulations on
Foreign-Invested Financial Institutions” stipulates that foreign banks must wait one year between
receiving approval for a given branch and submission to the CBRC of an application to open another
branch.  Canada noted in the 2002 TRM exercise that this appears to be inconsistent with China’scommitment in its Schedule of Specific Commitments to only retain prudential restrictions in its
licensing regime for banking.  While China remarked last year that opening new branches could place
“unhealthy pressure on the soundness of operations and risk management” [S/FIN/M37, Paragraph
21, 2.d)], could China please indicate whether it has experienced any occurrences of this in relation to
internationally active banks that often set up numerous branches at the same time in other nationalmarkets?  As well, are domestic banks in China bound by this same restriction?
14. In Canada’s submission for the TRM process in 2002 (S/FIN/W/20), Canada noted that
Article 30 of the "Administrative Regulations on Foreign-Invested Financial Institutions" requires that
the value of a foreign bank's foreign currency deposi ts received within China shall not exceed 70% of
the value of its foreign currency assets within China.  Further, Canada stated that this requirementlimits the ability of foreign banks to lend foreign currency without borrowing from Chinese banks or
bringing in foreign currency from abroad.  In its response last year (S/FIN/M37, Paragraph 57), China
did not outline the prudential rationale for this requirement, nor explain how this requirement is
consistent with China’s Market Access commitments under Article XVI of the GATS.  However,S/FIN/W/33
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China did note that this requirement had been relaxed from a previous 40% limit, and that the 70%
limit “would be further relaxed during the five year transitional period.”  Can China please explain the
prudential rationale for the present 70% limit, and provide details of its plans to relax this restriction?
15. In late 2002, the PBOC issued Draft Notice No. 28 containing regulations that would cap the
amount of RMB that banks can borrow on the interbank market to fund their lending business at 40%of their RMB deposits.  Can China please confirm whether it is still considering introducing these
regulations and whether it is considering any amendments pursuant to the comments it has received?
While China claimed during the 2002 TRM exercise that these rules would meet a National Treatment
test [S/FIN/M37, Paragraph 21, 2.c)], this cap 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.  Keeping in mind that National Treatment is
assessed not only on whether treatment is similar, but also whether this treatment affords equalcompetitive opportunities (as described in Article XVII.3 of the GATS) could China please explain in
more detail how the draft regulations are consistent with its National Treatment obligations in its
Schedule of Specific Commitments?  As well, in relation to the above-mentioned likely effect of
limiting lending by foreign banks, could China please  explain how artificially limiting interbank loans
is consistent with its GATS Market Access obligations?
C. G
ENERAL
16. Canada has previously noted that China's licensing requirements for foreign participation in
the banking, insurance, and fund management sectors all have complex multi-stage approval
processes for establishment of new locations.  These often involve an initial approval for a
preparatory office, and then another approval to commence operations.  These processes can be verycostly and time consuming for firms and may contradict the spirit of Paragraph 308 of the Working
Party Report, namely that "China's licensing proced ures and conditions would not act as trade barriers
to market access and would not be more trade restrictive than necessary."  In its intervention during
the 2002 TRM exercise [S/FIN/M37, Paragraph 21, 1.a)], China addressed Members’ complaints
about a “multi-tiered application” process, but only made reference to cases where applications areincomplete or fail to meet CIRC requirements.  Canada would like to reiterate that its concerns lie
with the multi-stage application processes outlined here and contained in the "Administrative
Regulations on Foreign-Invested Financial Institutions", the "Administrative Regulations on Foreign-
Invested Insurance Companies", and the "Administrative Regulations on Foreign Participation in the
Establishment of Investment Funds".  Can China please comment on the prudential rationale for
applying multi-stage branch-licensing procedures (i.e. requiring the establishment of a preparatory
office and often imposing a several month waiting period before a final inspection, after which thefirm may be permitted to commence operations) on firms that have already successfully established
their business in China?  As well, can China please explain how complex approval procedures for
successive branches or locations of a foreign-inve sted financial institution are consistent with its
Market Access commitments and Paragraph 308 the WTO Working Party Report on China’s
Accession?
17. While regulatory transparency has improved markedly since China’s accession to the WTO
and Chinese regulatory authorities have demonstrated a genuine interest in receiving input from
financial institutions and other WTO Member governments, Canada would like to note that the
periods provided for public comment on the July 31, 2003 draft “Implementing Rules for the
Regulations of the People’s Republic of China on Administration of Foreign-Funded InsuranceCompanies”, and the August 18, 2003 draft “Administrative Regulations of the People’s Republic of
China on Insurance Companies” [issued by the CIRC]  were very short by international standards and
did not afford enough time for a considered response, especially given the need to allow time for
translation of relevant documents.  Canada encourages the Chinese regulatory authorities to provideS/FIN/W/33
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as much time as possible for public comment and to consider adopting a common standard across the
CBRC, CIRC and CSRC for public consultation periods on draft rules and regulations.
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