New supplement amends financial cooperation provisions of CEPA - International Law Office

Introduction
Banking sector
Amendments
Comment

Introduction

The Mainland/Macau Closer Economic Partnership Arrangement (CEPA), a free trade agreement signed on October 17 2003, aims to promote preferential access to the Chinese market for qualifying products, companies and residents of Macau, in accordance with World Trade Organisation policies. The CEPA is an open protocol covering three major economic and trade areas (trade in goods, trade in services and trade and investment facilitation). It has been amended by eight supplements (published between October 29 2004 and December 14 2011) in order to broaden the scope of its provisions. Supplement IX, which was signed on July 2 2012, revised the measures taken one year previously regarding the trade and investment facilitation sector in order to strengthen this area.

This update first considers the CEPA in regard to the banking sector, then analyses the measures taken to improve access to the banking and financial sectors by Supplement IX.

Banking sector

Under the CEPA, the banking sector comprises:

• the acceptance of deposits and other repayable funds from the public;
• all types of lending, including consumer credit, mortgage credit, factoring and financing of commercial transactions and financial leasing; and
• all means of payment and funds transfers, including credit and debit cards, travellers' cheques and bank drafts (including payment of export and import operations) and guarantees and commitments made and currency transactions conducted on the bank's behalf or on behalf of its clients.

The initial commitments made under the CEPA stipulate that Macau banks that wish to establish branches or legal entities in China, as well as Macau financial holding companies that wish to create legal entities in China, must possess total assets of at least $6 billion at the end of the year preceding such request. However, if such entities create legal persons on the mainland through joint ventures, the prior establishment of representative institutions in China is not mandatory.

The CEPA provides that branches of Macau banks in China must fulfil the following requirements in order to apply for authorisation to engage in commercial activities in renminbi:

• The branch in China should be in operation for more than two years; and
• The competent authority should value the gains from China based on the overall profitability of all bank branches in China, rather than each branch individually.

Supplement II reduced the evaluation requirements relating to working capital. The assessment of working capital is no longer made through an individual branch, but instead comprises a comprehensive analysis of all branches. The working capital of a branch may be at least Rmb300 million ($47 million), provided that the mean working capital of all branches in China is at least Rmb500 million.

Supplement IV further reduced the minimum amount of total assets (at the end of the year preceding the request) required from Macau banks that wish to acquire stakes in Chinese banks from $10 billion to $6 billion. However, the minimum period of substantial commercial activity required from commercial banks or financial holding companies was increased – the Macau bank or financial holding company must now exercise commercial activity for at least five years (previously three years), or alternatively operate as a branch for at least two years and exercise a substantial commercial activity for at least three years.

Supplement VI provided that a branch of a Macau bank established in Guangdong province could lead to the establishment of branches in cities in Guangdong province other than the city where the original branch is located, in accordance with the applicable Chinese regulations regarding the establishment of branches. The same applies to the establishment of Chinese-incorporated banks by a Macau bank whose capital is held by foreign investors.

Supplement VII stipulated a series of temporal and procedural requirements for the filing of an application to establish in China a wholly foreign-funded bank or a foreign bank branch, whether a Macau banking institution operating in China or a foreign banking institution.

Finally, Supplement VIII, signed in December 14 2011, provided that banks incorporated in China by Macau banking institutions could sell mutual funds.

Amendments

Supplement IX further extends the activity of Macau banks on the mainland, allowing those that meet the conditions to offer custodial and depository services for funds for the settlement of transactions, as well as guarantees of futures contracts for customers of securities brokerage firms. It also allows Macau financial institutions to establish in Guangdong province, on a trial basis, consumer finance companies under the Management Measures for the Exercise on a Trial Basis of Consumer Finance Companies. Finally, it permits Macau banks that wish to contribute to the economic development of the Hengqin New Area to establish branch offices or institutions of legal entities, provided that their total assets at the end of the year preceding the request are no less than $4 billion. This measure, which is exclusive to Macau, lowered the previous requirement from $6 billion to $4 billion. It is hoped that it will foster greater integration with the Hengqin Special Economic Zone, taking into account the various proposals for expansion of the Macau Special Administrative Region to this zone.

In regard to securities brokerage and futures, Supplement IX paves the way for Macau securities brokerage firms to:

• establish consulting companies in China;
• invest in financial securities with mixed capital; and
• act solely as business consultants on securities investment as subsidiaries of securities brokerage firms based in China.

These companies must meet the requirements for qualification as members of foreign securities brokerage firms, with foreign capital participation (as stipulated in previous supplements) and the capital held by Macau companies being no more than 49%.

Comment

The banking sector - a particularly sensitive area for Chinese financial and monetary policy - has undergone a slower evolution than the other areas covered by the CEPA. Although companies and financial institutions in Macau enjoy special status when entering the Chinese market, the evolution under the CEPA has been incremental. The amendments made by Supplement IX should accelerate this process, although only in relation to the Hengqin Special Economic Zone, and demonstrate that given Macau's economic situation, the path to deepening its integration with China should perhaps take a geographical rather than a sectorial approach.

For further information on this topic please contact Pedro Cortés or José Filipe Salreta at Rato Ling Vong Lei & Cortés Advogados by telephone (+853 2856 2322), fax (+853 2858 0991) or email (cortes@lektou.com or salreta@lektou.com).