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In attempts to aid ongoing restructuring, China will allow foreign investors to own equity stakes of up to 25 percent in rural financial institutions, seeking their expertise and capital.

 

The United Rural Cooperative Bank of Hangzhou (URCB) and the Tianjin Rural Cooperative Bank have been selected as pilot banks, while two rural commercial banks will be chosen later this year, an official with the China Banking Regulatory Commission (CBRC) said yesterday.

 

But the ceiling of foreign equity ownership by a single investor will likely be set at 15 percent for the pilot banks, which compares to 20 percent applied to other banks, he said, refusing to say if the 25 percent ceiling of total ownership applies.

 

"It has been decided that foreign ownership of rural credit cooperatives will be the same as other financial institutions," the official said. "But since the rural credit cooperatives are smaller in terms of capital, the percentage of foreign ownership will be smaller."

 

The State Council, or China's cabinet, formally approved foreign and private capital to invest in rural financial institutions in a circular released on Tuesday.

 

Foreign investors are currently allowed to own a combined 25 per cent stake in a Chinese financial institution. A single foreign investor can hold no more than 20 per cent.

 

Reform of China's rural credit cooperatives (RCCs) started in June 2003, and has since spread to nearly all of the original 3,000 RCCs throughout the country. By the end of last year, 12 rural commercial banks and 60 rural cooperative banks had been set up by merging RCCs, and nine more banks won approvals. The rest of the RCCs will be restructured into county-based credit unions.

 

Foreign investors showed a growing interest in the RCC-turned-banks as the sector showed potential for profitability after years of reform and State assistance. The RCCs reported their first combined profit in 2004 after 10 years in the red.

 

Netherlands' Rabobank and the International Finance Corp, the World Bank's private sector arm, signed a letter of intent with URCB on the transfer of a combined 24.9 percent stake in November 2004. The two banks are also in talks with the Tianjin Rural Cooperative Bank for a possible stake purchase.

 

American United Bank has also made a proposition to the Shaoxing County Rural Cooperative Bank.

 

RCCs are facing a rare opportunity to grab a bigger share of the vast county-level market, analysts say.

 

The State-owned Big Four banks, which control more than half of China's banking assets, are withdrawing from approximately 2,000 counties to strengthen their defences against foreign rivals, which are scheduled to be granted full access to the local market by the end of this year, as part of China's World Trade Organization commitments.

 

(China Daily February 23, 2006)