Hong Kong-based banks, both local and foreign, are rushing to seize the opportunities which the Closer Economic Partnership Arrangement (CEPA) has put within their reach. Not only are they benefiting from business from the increased influx of mainland visitors to Hong Kong, many of them are also looking forward to extending their operations in other parts of China.

CEPA, which came into effect on January 1, enables Hong Kong service suppliers, including banks, to enter the mainland now - earlier than allowed under the country's accession agreement with the World Trade Organization (WTO). With the capital requirement for banks doing business on the mainland having been reduced to US$6 billion from US$20 billion, the threshold to set up there has been cut in a way that opens the field to smaller players.

The banks must first be incorporated or established in Hong Kong, however. They must also own or lease business premises and pay profits tax here. In addition, 50 per cent of their staff must be either Hong Kong residents without limit of stay or mainlanders residing in the SAR on a one-way permit.

The Hong Kong Monetary Authority (HKMA) estimates that under new rules connected with the arrangement Hong Kong-registered banks will establish about 20 branches on the mainland in the next three years.

According to Peter Wong, director of Standard Chartered Bank and current chairman of the Hong Kong Association of Banks, between six and seven members of the association have recently applied for licences to operate on the mainland, mainly in the Guangdong area.

First off the mark was Wing Lung Bank whose application to set up a branch in Shenzhen was recently approved by the China Banking Regulatory Commission (CBRC). The new branch will help the bank serve its Shenzhen and Dongguan customers - mostly Hong Kong small and medium-sized enterprises. Wing Lung registered assets last June of HK$67.1 billion.

Dah Sing Bank and Shanghai Commercial Bank have also submitted applications to the CBRC.

However, it is not just local banks that are jumping into action. Last September Taiwan's Fubon Financial Holding Corporation said it would buy International Bank of Asia in Hong Kong. This is widely regarded as an attempt to use Hong Kong as a springboard to enter the mainland.

In addition, two major foreign banks operating in Hong Kong, Citibank and Standard Chartered Bank, have recently applied to incorporate their businesses locally. By incorporating, the two foreign banks are seeking to obtain the status already enjoyed by their main competitor, Hong Kong and Shanghai Banking Corporation (Hong Kong Bank).

Hong Kong Bank has been incorporated locally in Hong Kong since its foundation in March 1865, although the global headquarters of the HSBC Group, to which it belongs, is now in London.

CEPA's stipulation that 50 per cent of a company's employees have to be in Hong Kong for it to qualify as a local firm could have been problematic for the British-owned bank. Though based in Hong Kong, it operates throughout the Asia-Pacific region, where it has about 40,000 employees. There are also roughly 2,500 employees on the mainland.

"However, if we include the 17-18,000 employees of our subsidiary Hang Seng Bank, there is no doubt that we qualify, " says Raymond Or, the bank's general manager.

Given its ample assets, he says, the bank did not need the capital threshold to be lowered, but it benefits from CEPA in other ways.

CEPA makes it easier for mainland branches of Hong Kong-incorporated banks to apply for licences to extend their business scope. In the past, before it would grant a licence, the People's Bank of China, or latterly the CBRC, had to be satisfied that each branch had been profitable for two of the last three years consecutively.

"This was a problem for us," Or says. "Two of our branches in China - I think Wuhan is one of them - would not have qualified under that rule."

Now, under CEPA, a bank can be assessed on a consolidated basis, instead of branch by branch.

"CEPA is evolving," says the Hong Kong Bank general manager. "It doesn't stop still. Businesses need to come up with new ideas that they channel to Beijing via the Hong Kong government. They need to be proactive."

Kathy Cheung, head of communications with Citibank, predicts there may be more opportunities for Hong Kong-incorporated banks in future, deriving either from CEPA or other arrangements. "Actually, we are looking beyond CEPA."

(HK Edition 05/03/2004 page3)