China to Relax Rules on Foreign-Owned Rural Banks

China plans to make it easier for foreign banks such as HSBC Holdings Plc to set up rural operations as the government seeks to boost funding for farmers, said two people with knowledge of the matter, reported The Bloomberg.

Overseas banks will be allowed to manage operations in different counties through a single unit or a China-incorporated subsidiary, the people said, declining to be identified before an announcement. Banks must now oversee rural businesses through offshore entities with separate teams for each unit.

``This will spare them the trouble of having to either find a management team locally for every rural subsidiary or send experienced bankers from outside China,'' said Roy Zhang, a Shanghai-based banking lawyer and partner at King & Wood, one of China's largest law firms. ``It helps contain costs and makes management much easier.''

President Hu Jintao is trying to make loans more accessible for China's more than 700 million farmers to combat a widening wealth gap and boost output of grain and pork after prices soared. The May 12 earthquake in Sichuan, which cost the lives of more than 65,000 people, also damaged thousands of hectares of crops and killed at least 12 million farm animals, Vice Minister of Agriculture Wei Chaoan said May 17.

The China Banking Regulatory Commission will initially let two or three foreign financial firms operate under the new rules in a pilot program, the people said. Current rules won't be formally revised until after the program is evaluated, they said.

China first eased rural banking rules in December 2006, allowing foreign firms such as HSBC and Citigroup Inc., along with local investors, to establish rural banks and loan companies in selected areas.

HSBC, Europe's biggest bank by market value, set up a rural bank in Suizhou in central Hubei Province in December, the only foreign-owned countryside lender so far. Citigroup, which has booked more than $40 billion of credit losses and writedowns since the U.S. subprime mortgage market collapsed, plans to set up at least than 10 rural banks and loan firms in China, Zang Jingfan, CBRC's cooperative finance head, said in October.

HSBC will open a second rural bank in China in the third quarter, Executive Director Peter Wong said in Beijing yesterday. Wong, who's chairman of HSBC's rural bank in China, said running a countryside lender from outside the nation hasn't led to difficulties.

``We operate our China rural banking operations out of Southeast Asia, which is very familiar with Chinese culture and ways of doing business,'' he said in an interview.

The CBRC will also allow financial companies other than banks to be the biggest or only shareholder in rural banks, the people said. The largest investor must own at least 20 percent, they said.

Such a move would allow companies including American International Group Inc., the world's largest insurer by assets, to compete in a market where the regulator estimates 20 trillion yuan ($2.9 trillion) of bank loans will be needed through 2020.

Under the CBRC plan, rural banks will be allowed to lend the equivalent of as much as 10 percent of their net capital to a single borrower, from 5 percent currently, said the people. The ceiling on loans to a single group of companies under the same parent will be raised to 15 percent of the lender's net capital from 10 percent.

In addition, geographical restrictions on rural banks and loan companies will be removed, the people said. The CBRC will also let Chinese individuals and financial institutions other than banks set up loan firms, and remove restrictions on funding such companies, they said.