People's Bank of China and China Banking Regulatory Commission jointly issued Supplementary Notice On Commodity Property Mortgage Loans on December 5, 2007.
Under this Notice, commercial banks shall determine the number of mortgage loans granted to mortgagors in consideration of the family as a unit, rather than the individual. An application for a mortgage from a family which has already been bound by a mortgage from a bank for their first residential property but the average area per capita within the first property in question is lower than the local standard shall be processed under the same rules which apply to mortgages for a first property. The above rules also apply to applications for a second mortgage from a family in which the property is mortgaged with the Housing Provident Fund. Commercial banks are not allowed to accept any application that contains false information or false testimony.
Guide on Compliance Risk Management for Commercial Banks (17/04/2007)
(17/04/2007)
1. How is a compliance risk management system set up?
Commercial banks must set up the compliance risk management system corresponding to their operational scope, organizational structure, and business scale, and must put in place three basic systems - namely a compliance performance assessment system, a compliance accountability system, and a good faith reporting system.
2. What is the role of the board directors?
The Guidance contains provisions on the management duties of the board of directors, board of supervisors, and senior management of commercial banks. These provisions require that the board of directors be responsible for the examination and approval of compliance policies and the compliance risk management report, for assessing performance of the compliance risk management policies. The board of directors must also appoint the risk management committee, the internal audit committee, and a specially established compliance management committee, which should supervise
compliance risk management on a day-to-day basis.
3. What is the role of the board of supervisors?
The board of supervisors is responsible for supervising the performance of the compliance management duties by the board of directors and senior management. Senior management is deemed to be responsible for stipulating and implementing the compliance policies, appointing the person in charge of compliance, identifying the compliance management departments and their organizational structure, identifying the major compliance risks that commercial banks encounter, examining and approving the compliance risk management plans, submitting the compliance risk management report on an annual basis, and reporting any material non-compliance events to the board of directors or the committees established thereunder, or to the board of supervisors in a timely manner.
4. What else does the guidance refer to?
The Guidance provides that the compliance management department must, under the direction of the person in charge of compliance, assist senior management effectively by identifying and managing the compliance risks faced by a commercial bank. According to the Guidance, the basic duties of the compliance management department include: (i) providing information on compliance to senior management, (ii) forming and carrying out the compliance management policies, (iii) ensuring compliance with the policies, procedures, and the operation manual, (iv) giving training on compliance to employees, (v) identifying and evaluating the compliance risks arising from the development of new products and new businesses as well as expansion of new business models, (vi) monitoring and testing the compliance risk systems, and (vii) maintaining a close working relationship with the regulatory authorities.
Can mortgages be registered with notary institutions in China?
Yes, they can. As a matter of fact, on February 20, 2002, the Ministry of Justice adopted and issued the Measures for the Handling of Mortgage Registration by Notary Institutions (the measures).
In accordance with these measures, if parties use "Other Assets" (as defined in the measures) as security for a mortgage, the notary institution where the mortgagor is located, shall be the registration authority. The measures also apply to the registration by notary institutions of residential, commercial and village enterprise mortgages if the local to provincial People's Government has stipulated that notary institution as being able to carry out mortgage registrations.
Under various laws and regulations, mortgage contracts can only be enforced after registration with a notary institution.
What are the prospects of reforms being introduced into China's banking sector for foreign investors in the near future?
China aims to have its banking system as strong and viable as possible by the time full foreign competition enters the fray in 2006. As a first line of defense, however, China has encouraged joint ventures between local players and foreigners to capture technology, skill and capital transfers. Foreigners are limited to owning stakes of 15 per cent in city commercial and stockholding banks, although this limit is currently under review and may be adjusted to 24.9 per cent.
Links with domestic players in China make obvious commercial sense for the right deal, given their two key competitive advantages - their local knowledge and their huge bank branch networks, with existing strong brand recognition, while China has allowed foreign banking entrants some access to its markets on their own, the roadblocks are still extensive and costly. As a result, the 53 foreign licensed banks control only 2 percent of China's domestic loan portfolios.
Three of Australia's listed banks are tackling three entirely different business models in their bid for profits from mainland China, each with a local partner.
Macquarie Bank, in partnership with former Australian Prime Minister Paul Keating, announced a joint venture last March with China Construction Bank ("CCB") to provide mortgage pre-settlement and title registration services to Shanghai's residential property market officially took off in China, following an announcement by Premier Zhu Rongji in July 1998, stipulating that state-owned enterprises were no longer required to provide accommodation for their employees.
Rather than compete for traditional loan and deposit business, Macquarie has cleverly focused on a niche where the investment bank believes it can leverage its traditional skill base to add value.
Meanwhile, the Commonwealth Bank of Australia's funds management arm, First State investments, announced in June, 2003 a joint venture deal with Shenzhen-based broker, Hantung Securities, together with China Southern Airlines Group and Nanjing YPC Refining and Chemical Company, to launch a domestic investment fund, subject to the approval of China Securities Regulation Commission ("CSRC").
The funds management sector has only recently opened to foreign joint ventures, with ING the first to successfully launch a RMB 4.5 bln (USD 547 mln) retail open-ended fund with China Merchant Bank, headed by Melbourne boy, Chris Ryan.
Meanwhile ANZ Bank is expanding its presence in the greater Asian region, using the traditional banking route. Its Asian investments stand at 2.5 per cent of the bank's equity with plans to take these to 10 percent.
After 17 years in mainland China, ANZ has two banking branch licenses - one in Beijing; one in Shanghai - each costing US$12 million in capital to open. Both have been rewarded with RMB licenses, after meeting China's profitability benchmarks, one of 28 foreign banks to do so. ANZ is also one of nine foreigners with a foreign currency license.
Links with domestic players make obvious commercial sense for the right deal, given their two key competitive advantages - their local knowledge and their huge bank branch networks, with existing strong brand recognition.
Following several years of dating locals, ANZ finally signed a cooperative alliance with the 300-branch Shanghai Rural Credit Cooperative on April 1, primarily a home mortgage lender, with only limited exposure to the big end of town. The aim is to leverage its local partner's franchise network with ANZ's risk management and superior technology capabilities.
ANZ's deal could prove cleverly placed, given Shanghai's 25 percent contribution to the national GDP, while its outlying regional population is set to grow from 17 million to around 60 million over the next 10 years, due to forced rural relocations.
The three Australian deals show that China's banking story can have two sides, with the banking scandals and non-performing loans the darker underbelly, contained primarily within China's four banking heavyweights.
What is the attention-getting issue in China's Banking Sector for foreign investors at the moment?
China's four main commercial banks (Bank of China, China Construction Bank, Industrial and Commercial Bank of China and the Agricultural Bank of China) control more than 65 per cent of China's loan and deposit portfolios. Their bad loan portfolio amounts to US$500 billion, 24.13 per cent of total outstanding loans to March 2003. By comparison, Australia's major banks had a non-performing loan ratio of just 0.8 per cent at the end of 2002.
However, there have been steps taken to address this serious issue of bad debts. The larger banks are moving forward rapidly, while some of China's smaller banks are said to have as many bad debts on their balance sheets as they have hidden and festering under a desk somewhere.
There has been considerable growth in the retail loans sector for many Chinese banks. One of the fastest-growing sectors of retail loan services (behind home and car loans) is credit extension for business start-ups.
Indicative of the growth in this area is the Bank of China's Shanghai branch, which recorded 107 per cent growth in the first five months of this year.
Many hope the bad debt cloud will also rise as authorities get serious about their clean-up efforts. China has recently announced its first-ever dedicated banking regulator, the China Banking Regulatory Commission ("CBRC"), formed to supervise the clean-up of its bad loan nightmare and the lifting of capital adequacy ratios to international standards, in line with the Basil Accord.
The commission president, Liu Mingkang, is already calling for a bank bail-out, which if enacted, will be China's third in six years.
