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Li Qiang

Following China's accession to the WTO in December 2001, foreign investment in China's banking sector has significantly increased.  This has happened at a time when the global banking community, going along with recent trend, continues to experience a wave of restructuring and merger activities. 

Implementing global bank mergers poses significant challenges to the merging banks, as a merger must occur in accordance with the laws of each jurisdiction in which banking assets are being transferred.  These challenges are no less apparent in China, where the banking sector and the regulatory framework are much less developed than in the United States or Western Europe.  This article briefly reviews some of China's banking regulations that affect the implementation of foreign bank mergers. 
Regulatory Framework  
Prior to September 2001, there was no published legislation in China on the regulatory framework for China's central bank, the People's Bank of China (PBOC), to approve foreign bank mergers. Foreign bank mergers were generally approved by the PBOC on a case-by-case basis based on internal rules. 
On 29 September 2001, the PBOC published the Notice regarding Issues relating to Merger and Name Change of Foreign Bank Branches and Representative Offices in China (the Notice).  The Notice sets out a two-stage approval process for foreign banks wishing to make a merger application to the PBOC prior to their merger in the relevant home jurisdiction.  In the event of a two-stage approval, the merging banks may apply to the PBOC for 'in-principle' approval of the merger of their branches and representatives offices in China (the China Merger) prior to their merger in the home jurisdiction.  Once their merger has occurred in the home jurisdiction, the merging banks may then apply for a PBOC 'final' approval of the China Merger.  This means that the China Merger cannot occur simultaneously with the merger in the home jurisdiction.  
The two-stage approval process described above is adopted in the Implementing Rules of Administrative Provisions on Foreign Invested Financial Institutions (the Implementing Rules) which came into effect on February 1 2002.  The Implementing Rules also expressly permits the merging banks to go through a single-step approval process and apply directly for PBOC's final approval after the merger in the home jurisdiction has been formally approved by the financial regulatory authority of the home jurisdiction. 
The Implementing Rules also provides that the registered capital (or operating capital) and business scope of the post-merger foreign bank branches are subject to re-examination by the PBOC. 
Transfer of banking assets and liabilities in light of merger

Assets and liabilities of foreign bank branches often include credit facility accounts consisting of loan agreements and security documents entered into with Chinese or foreign borrowers and security providers.  At this time, published PBOC regulations do not expressly address the transfer of such credit facility accounts to the post-merger bank branches; one therefore needs to look for guidance in Chinese laws and regulations outside the regulatory framework governing foreign banks. 
Notice and publication requirements

A limited due diligence on the credit facility accounts to be transferred to the post-merger bank branches should be conducted to determine whether and which third party consents are required to effectuate the transfer.  The merging banks should also comply with two Chinese Company Law requirements (which apply to bank mergers) that the merging entities should give notice to their 'creditors' and make three newspaper announcements of the merger.

Updating foreign debt and security registrations

Many of the loans and security documents of foreign bank branches are registered with relevant Chinese registration authorities; for example foreign exchange loans extended to entities incorporated in China should be registered with relevant local branches of the State Administration of Foreign Exchange (SAFE) where the borrowers are based, mortgages on land and buildings are registered with relevant local real estate registration authorities where the security providers are based or where the mortgaged assets are located, and mortgages on machinery and equipment are registered with the relevant local branches of the State Administration of Industry and Commerce where the security providers are based or where the mortgaged assets are located. 

After the PBOC has granted its final approval of the China Merger, the post-merger bank branches may approach the relevant registration authorities to update the relevant existing registrations in order to perfect the rights and interests of the post-merger bank.  This is usually a time-consuming task as the relevant borrowers, security providers and mortgaged assets can be located in many different parts of China. 

Another practical difficulty is that many officials of local Chinese registration authorities are unsophisticated, may not understand the legal effects of a merger, and therefore may insist that no existing registrations may be updated as a result of the merger unless with the express consent by the Chinese borrowers and security providers. 

Some local authorities may also be keen to impose registration fees applicable to the original registrations when foreign banks try to update the existing registrations. For example in the case of real estate mortgages, the original mortgage registration fees are usually based on the value of the mortgaged properties and can be quite significant in the aggregate if the number of mortgaged properties is substantial.  These fees may therefore substantially increase the financial cost of the merger. 

Conclusion

As the concept of mergers and acquisitions in China is relatively new and the relevant laws are not fully developed, Chinese legislation is only beginning to address mergers and acquisitions of foreign banks.  China can better facilitate foreign bank mergers on several fronts, including by publishing regulations expressly 


 permitting the automatic transfer of banking assets and liabilities, 

permitting the automatic updating of existing registrations of credit facility accounts, and 

waiving or reducing relevant fees for updating existing registrations, in light of bank mergers. 

Li Qiang works for Bruckhaus Westrick Heller L?ber an associated office of Freshfields Bruckhaus Deringer.


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Bank of China (BOC)

Implementing foreign bank mergers